Throne Games (Indian Politics 2019 - Who Will Conquer - ) 20180822 PDF

Special report Summer 2018
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
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Mahesh Nandurkar Contents

mahesh.nandurkar@clsa.com
+91 22 6650 5079 Executive summary ........................................................................................................ 3
Abhinav Sinha BJP’s game plan .............................................................................................................. 4

+91 22 6650 5069
Can the opposition stand united? ............................................................................... 33
Alok Srivastava
+91 22 6650 5037 X factors ......................................................................................................................... 50
Market impact ............................................................................................................... 63
Company profiles
Dabur .............................................................................................................................. 77
Godrej Prop .................................................................................................................... 83
HDFC .............................................................................................................................. 89
IndusInd Bank ................................................................................................................ 93
Infosys ............................................................................................................................ 97
ITC ................................................................................................................................. 103
Mahindra ...................................................................................................................... 109
Maruti Suzuki ............................................................................................................... 115
Sun Pharma .................................................................................................................. 121
September 2017’s
Boardroom nectar report,
assessing India’s business Appendices
leaders’ mood, was the
first of its kind.
1: Key regional parties ............................................................................................... 127
2: BJP state elections performance .......................................................................... 132
3: India’s governments ............................................................................................... 133
All prices quoted herein are as at close of business 21 August 2018, unless otherwise stated
The known world . . .
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 134.
2 mahesh.nandurkar@clsa.com 23 August 2018

Executive summary India strategy
Throne games
A 2014-style big win for Although Narendra Modi’s Bharatiya Janata Party (BJP) is still favourite to win
BJP appears unlikely. India’s upcoming 2Q19 general election, a repeat of 2014’s performance appears
unlikely. Political intrigue - in the shape of opposition parties uniting against the
ruling BJP, especially in the state of Uttar Pradesh - and anti-incumbency could
be the primary hurdles. While the equity market anticipates a long winter for
Congress and is already building in a Modi win, time will tell whose plot armour is
the strongest. Meanwhile, we advocate a large-cap portfolio that comprises rural
plays, housing and exporters.
Our base case is that Modi The government has undertaken several landmark reforms - inflation control, a
returns to power, but only goods-and-services tax, bankruptcy law, real-estate regulation and
with coalition partners demonetisation - but they have come at short-term economic cost, driving anti-
incumbency sentiment in some regions. Our base-case remains unchanged: Modi
should return to power but with the help of a coalition. If he wins again, he will
likely be able to carry out tougher reforms as by 2020 BJP will come very close to
a majority in the upper house as well.
If opposition unity holds The opposition has united under Modi’s meteoric rise. A potential successful
well in UP, it may cause a consolidation of alliance votes could dent BJP’s numbers, especially in the state of
big dent to BJP numbers Uttar Pradesh (UP), where - assuming the same voting pattern as in 2014 - this
could cause a c.50 seat loss. During the 2014 general election, the party won 71
of the state’s 80 seats (or 25% of its national total). Tamil Nadu could be another
large swing state: a potential alliance could add 20-25 seats to BJP’s total. With
around 10x the number of 3G/4G subscribers (now 400m) since the last election,
social media will play a major role. Religious factors, such as a possible resolution
of the Ram temple dispute, may also substantially impact the outcome of the poll.
Key worry will be stability In the run-up to the 2014 election, the market rose well in advance in expectation
of a possible non-Modi of a win for the development-oriented Modi. This time, the market has already
coalition government done the same. But as investors worry about the stability of a non-BJP
government formed by a large number of coalition partners, any contrary data
points related to opinion polls, state-elections and alliances could potentially
drive market underperformance. We note, however, the general success of
previous coalition governments with economic parameters holding well.
Large-cap plays comprising An analysis of the parties’ manifestos suggests a consensus exists on several main
rural consumption, policies, such as affordable housing, farmer welfare, job creation and
exporters and housing infrastructure. Current positive trends in housing and rural recovery should play
out irrespective of the outcome. Our top picks are laid out in the following table.
Valuations of preferred stocks

Stock Mkt cap PE (x) PB (x) ROE (%) Current Rec Target TSR
(US$bn) FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL price (Rs) (Rs) (%)
Dabur 11.6 51.7 44.8 14.5 12.3 27.7 29.6 458.8 BUY 500 9.8
Godrej Properties 2.3 134.9 45.5 6.1 5.5 5.8 12.8 708.2 BUY 1,097 54.9
HDFC¹ 46.3 11.2 8.7 2.2 1.7 15.6² 16.5² 1,912.7 BUY 2,480 30.9
IndusInd Bank¹ 17.0 26.5 21.2 4.5 3.8 17.5 18.7 1,976.0 BUY 2,350 19.6
Infosys 43.3 18.8 17.0 4.4 4.4 23.9 25.7 1,384.3 BUY 1,560 17.2
ITC 54.7 31.6 28.1 6.7 6.0 22.3 22.5 312.8 BUY 390 26.6
M&M³ 17.1 24.1 20.6 3.5 3.1 15.4 15.9 957.6 BUY 1,120 17.9
Maruti 39.4 29.0 24.2 5.8 5.0 21.2 22.1 9,105.1 BUY 11,300 25.2
Sun Pharma 21.8 33.2 24.7 3.6 3.2 11.4 13.8 635.3 BUY 750 18.6
Note: Price as at 21 Aug 2018. ¹ Adjusted for 100% NPL coverage and investment in subs (for IIB and HDFC). ² Core ROE for HDFC. ³ Showing consolidated PE.
Source: CLSA
23 August 2018 mahesh.nandurkar@clsa.com 3

Section 1: BJP’s game plan India strategy
BJP’s game plan

Historic mandate in 2014 in Narendra Modi’s BJP won a historical mandate in 2014’s general election - the
favour of BJP first time in 30 years a single party was able to win an absolute majority. A repeat
of that in 2019 is unlikely. The government has undertaken several landmark
reforms - inflation control, the Goods and Services Tax (GST), a bankruptcy law
and the Real Estate Regulation Act (Rera) - that have come at a short-term cost to
the economy, leading to some anti-incumbency sentiment. BJP’s own allies have
seen some churn, which could adversely impact its chances. Recent state/by-
election results have also raised some concerns and a lot will depend on whether
the prime minister’s campaign trips ahead of the general election can swing voters
in his favour, the possibility of which remains high. The cabinet has already taken
a more pragmatic turn in its policies with a focus on doubling farmers’ income,
free medical insurance and cooking-gas cylinders. Our base case remains - Modi
will return to power but with a smaller majority and the help of a coalition,
possibly with some new partners from southern India, particularly Tamil Nadu.
Modi remains popular but a repeat of 2014 unlikely

Modi remains the most After coming to power with a strong majority, Modi has retained his popularity
popular political leader among voters, reflected in several victories in state elections and in popularity
surveys by the likes of Pew, a research centre. His ability to swing elections
through his oratory skills and personal connection with audiences cannot be
matched by any other political leader in India. In Karnataka earlier this year, the
prime minister’s blitzkrieg across the state just prior to its elections changed their
whole dynamic. Opinion polls, which had been indicating Congress leading, began
to show BJP and Congress were, post campaign tour, neck and neck. When the
final results were announced, BJP had done much better than expected and
emerged as the single largest party; Congress, however, formed the government
with JD (S) after making a post-poll alliance.
Figure 1
BJP’s win was the biggest in Biggest number of seats won by a single party in Indian general elections
three decades (No. of seats)
450
404
400
350
300 282
Majority needed: 272
250 244
206
200 182 180
161
143 145
150
100
50
0
1984 1989 1991 1996 1998 1999 2004 2009 2014
Source: Election Commission

While the prime minister continues to be more popular than any other leader in
India, the anger felt towards the Congress party, which was at a peak during the
last general election, has somewhat subsided since then. The twin factors of
personal popularity and anti-Congress sentiment drove BJP’s record win, but this
is not the case for the 2019 election. In spite of his popularity, Modi and his party
are unlikely to repeat 2014’s performance.
Figure 2
Rahul Gandhi’s popularity Popularity ratings for Narendra Modi and Rahul Gandhi
has improved but Modi (%)
100
continues to have a big lead Rahul Gandhi Narendra Modi
87 88
90
81
78
80
70
62 63
58
60
50
50
40
30
20
10
0
2013 2015 2016 2017
Source: Pew Research
Modi has been a star Although India prefers the parliamentary democracy system over presidential
campaigner for the party democracy, Modi’s popularity means he prefers to fight elections in a more
presidential style. BJP candidates benefit immensely from his extensive
campaigning across the length and breadth of the country during pre-election
rallies - the 2014 campaign saw him attend 437 rallies and travel around
300,000km.
The BJP’s power has spread wider . . .

BJP power expanded from When Modi came to power in May 2014, BJP was in sole power in only a handful
six states pre-Modi to 19 of states, including Madhya Pradesh, Chhattisgarh, Goa, Rajasthan and Modi’s
states now
home state of Gujarat. It was also in power in Punjab and Andhra Pradesh
through its regional allies. Together these states accounted for 25% of India’s
population and 25% of GDP.
There have also been some BJP has had a phenomenal run in state elections over the last four years,
setbacks for the BJP spreading its rule across India; it now covers 19 of the 29 states, accounting for
63% of the population and 54% of GDP. Most of these gains have accrued in
states where the party had performed well in 2014. While there have been many
successes, there have also been setbacks - the most important being a failure to
gain in states where it had not performed well in the last general election.

Figure 3 Figure 4
BJP/allies state governments (May 2014) BJP/allies state governments (August 2018)
Jammu & Kashmir Jammu & Kashmir

BJP/BJP alliance-ruled states BJP/BJP alliance-ruled states
Himachal States ruled by BJP/ally Himachal States ruled by BJP/ally

Pradesh Share of GDP: 25% Pradesh Share of GDP: 54%
Punjab Uttarakhand Share of population: 25% Punjab Uttarakhand Share of population: 63%
Haryana Haryana
Delhi Delhi
Sikkim Arunachal Pradesh Sikkim Arunachal Pradesh
Uttar Pradesh Uttar Pradesh

Rajasthan Rajasthan
Assam Assam
Nagaland Nagaland
Bihar Bihar
Meghalaya Meghalaya
Manipur Manipur
Jharkhand Jharkhand
Tripura Tripura
Madhya Pradesh West Mizoram Madhya Pradesh West Mizoram
Gujarat Bengal Gujarat Bengal
Chhattisgarh
Chhattisgarh
Orissa Orissa
Maharashtra Maharashtra
Telangana Telangana
Andhra Andhra
Goa Pradesh Goa Pradesh
Karnataka Karnataka
Andaman & Nicobar Islands Andaman & Nicobar Islands
Lakshwadeep Lakshwadeep
Tamil Nadu Tamil Nadu

Kerala Kerala
Source: Election Commission, Census, Niti Aayog Source: Election Commission, Census, Niti Aayog; J&K currently under gov rule
BJP has wrested 14 states from non-BJP parties since April 2014
BJP has gained power in 14 There have been 26 states elections (including two union territories) since April
new states . . . 2014, including four states that had elections at the same time as the 2014
general election. Out of these 26 states, BJP and its allies are now in control in
16. Notably, in 14 of these, BJP was not the incumbent and essentially gained
power from the opposition or was able to form alliances with dominant parties in.
At the same time, it was able to retain power in the key state of Gujarat, albeit
with a reduced majority.
Figure 5
. . . but has also lost two Performance of BJP/NDA¹ in state elections from April 2014 onwards
states
Under States retained
president's rule by NDA 26 state elections
1 2 since April 2014
States
retained by
non-NDA
parties
7
States where
NDA was not
incumbent
States lost by NDA 14
2
Source: Election Commission. ¹ National Democratic Alliance; also inc two union territories of Delhi, Puducherry

BJP gaining dominance in While some of these wins were on expected lines and are testimony to PM
the north east in a Modi’s continued popularity the massive victory in UP, near complete dominance
surprisingly short time in the north east in such a short span of time and BJP’s ability to stich post-poll
alliances in the event of a hung verdict have been the most striking features in
state elections.
Unprecedented win in Uttar Pradesh

Large majority in UP UP is the biggest state in India in terms of population, accounting for 80, or 15%
elections has been but one of the total, seats in Lok Sabha (Indian parliament). BJP, with a smaller alliance
BJP highlight since 2014 partner, won 73 of these seats in 2014 and repeated its performance in the 2017
state elections, gaining more than 80% of the seats.
Figure 6
Trends in the share of seats and votes (Uttar Pradesh)

Party 2012 state elections 2014 general election 2017 state elections
Seats Vote share (%) Seats Vote share (%) Seats Vote share (%)
BJP+ allies 47 15 73 43 325 41
SP¹ 224 29 5 22
56 28
Congress 28 12 2 7
BSP² 80 26 0 20 19 22
Others 24 18 0 7 3 8
Total 403 100 80 100 403 100
Source: Election Commission of India; ¹ Samajwadi Party, ² Bahujan Samajwadi Party
The rise of anti-incumbency . . .

Some signs of anti- Though BJP has had a great run in state elections, it has also seen some reverses.
incumbency are visible The recent narrowing of its majority in Gujarat and by-election reverses are
indicators of increase in anti-incumbency directed towards the government.
Figure 7
BJP’s key reverses

State Date of Total BJP BJP seats in Comment
election seats seats previous election
Delhi Feb-15 70 3 32 Aam Aadmi Party secures majority
Bihar Nov-15 243 53 91 BJP defeated by alliance of combined opposition. JD (U)
broke from alliance in Jul-17 and formed gov’t with BJP
Punjab Mar-17 117 18 68 BJP and ally Akali Dal removed from power
Gujarat Dec-17 182 99 115 BJP formed government but with reduced majority
UP by-polls 2014 2018 2014 BJP 2018
in 2018 winner winner vote share vote share
Gorakhpur BJP SP 52 47
Phulpur BJP SP 52 39
Kairana BJP RLD, opposition 51 47
consensus candidate
Source: Election Commission, CLSA
BJP suffered convincing defeats in Delhi and Punjab, where it saw sharp declines
in its seats. Before that, combined opposition in the eastern state of Bihar
defeated it and formed the government. BJP had won 80% of seats in Bihar in the
2014 general election and the defeat was a big setback. But ideological
differences amongst the opposition parties led to a split and BJP returned to

Recent setbacks in Gujarat power with JD (U) in July 2017. It is a more recent reversal that is worrying for
state elections and UP by- the BJP. A narrowing majority in Gujarat was a result of defeats in several rural
polls constituencies that has worried BJP and could have implications for 2019.
Similarly, defeats in three UP by-polls against combined opposition would suggest
the party has its work cut out next year if the opposition combines for the general
election.
. . . as some reforms have a near-term economic cost

Several politically tough Modi’s tenure has been marked by disruptive reforms, several of which have
decisions have been taken structurally improved India’s economy long-term, but at a near-term economic
and political cost. These reforms include the adoption of an inflation-targeting
framework, the passage and functionalisation of the Insolvency and Bankruptcy
code (IBC), the roll out of the Real Estate Regulatory Act (Rera), the landmark GST
reform and demonetisation. These reform measures have negatively impacted a
diverse set of economic activities, including farming, real estate, trading/retail,
and smaller unorganised and inefficient businesses. With the commensurate
benefits by nature relatively long term, near-term pain is unavoidable.
Figure 8
Reforms hit large sections Reforms driving anti-incumbency

of economic activity over
short-to-mid-term
Near-term
Reform Long-term benefit
negative
Inflation Sets an inflation target (4%) for the central bank; aim Farmers/
targeting to bring down inflation and interest costs long term real estate
Substantial simplification of indirect taxes; boost to

GST formalisation by curtailing tax evasion SMEs, traders
Bankruptcy Resolution of corporate bankruptcies by creating a Banks, capital

Code legal framework for possession and sale of assets expenditure
Rera
Regulation of real-estate sector to ensure timely Real estate,
completion of projects Job creation
Demonetisation Reducing cash transactions/black money Rural/

unorganised
Source: CLSA
Inflation-targeting framework adoption: Not to everyone’s benefit

Modi government and RBI The government inherited persistently high double-digit consumer price inflation
adopted a 4% inflation (CPI). With an aim to bring this down sustainably, it signed a formal inflation-
target targeting framework with Reserve Bank of India (RBI) in March 2015, which
explicitly targeted 4% +/- 2% CPI inflation over the long term (starting from
January 2017). This required a legislative-change amendment to the RBI Act to
make this permanent.

Figure 9
23 August 2018
The ups and downs of Modi’s tenure
12,000 Nifty
Long-term capital-
gains tax on equities
11,000
imposed
10,000 BJP wins UP

Inflation-targeting elections
framework signed Rajan resigns as First of 12 large NPAs
BJP loses Bihar
9,000 with RBI RBI governor resolved by NCLT under
elections
bankruptcy process
Section 1: BJP’s game plan

mahesh.nandurkar@clsa.com
GST, Rera
8,000 implemented
Demonetisation
Bankruptcy code is
7,000
Fuel prices implemented
deregulated
Accelerated NPL
6,000 recognition by RBI,
Modi wins
80% YoY rise in NPAs
5,000
4,000
Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18
FY15 FY16 FY17 FY18 FY19
 Fuel subsidies decline  Government’s Jam  Legislative progress  GST and Rera roll out  BJP emerges as
post diesel and petrol trinity (UID, financial with GST and Rera from 2Q cause some largest party in
price deregulation inclusion and mobile) reforms passed economic disruption Karnataka but fails to
 Financial inclusion DBT framework takes  NPA issues,  RBI identifies top 12 form government as
programme launched shape demonetisation drive and then next 50 Congress enters
Key  RBI starts a rate cut  Land and labour Nifty earning defaulters, to be taken alliance with JDS
events cycle post from Jan- reforms attempted downgrade of 13% up for resolution  BJP loses to united
15 the signing of but stalled amid lack  BJP’s victory in UP  Nify earnings opposition in by-polls
inflation-targeting of consensus state government downgraded by 9%  Domestic flows start
India strategy
framework  NPA issues drive Nifty elections triggers ex primarily on NPA issues slowing down
 FDI limits raised, earning downgrade of Bihar ally JDU to  A united opposition  First of large
including in retail and 22% come back to NDA emerges, challenging bankruptcies see a
insurance BJP in key states resolution by NCLT
Source: CLSA, Bloomberg

9
Figure 10
CPI has stayed within the CPI trend

4% +/-2% band since the (% YoY)
14
framework was adopted
12 Inflation
targeting
10 adopted
8 Avg CPI :
8.9%
6 Avg CPI:
4.4%
4
BJP comes
to power
2
0
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Jan 12
May 12
Jan 13
May 13
Jan 14
May 14
Jan 15
May 15
Jan 16
May 16
Jan 17
May 17
Jan 18
May 18
Source: CLSA, MOSPI
RBI, consequently, has maintained positive real interest rates, a major change for
India, which had seen nearly a decade-long period of negative real rates even as
both growth and CPI stayed high. The result has been contained inflation within
the targeted band.
Figure 11
Central bank has Real policy rates (Repo rate minus CPI)
maintained positive real (% YoY)
5
rates during Modi’s tenure
4
(1)
(2)
(3)
(4)
(5)
(6)
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Jan 12
May 12
Jan 13
May 13
Jan 14
May 14
Jan 15
May 15
Jan 16
May 16
Jan 17
May 17
Jan 18
May 18
Source: CLSA, MOSPI, RBI
Rural inflation and property High CPI was visible through persistently high food inflation and a fast rise in
pricing has been weak real-estate prices. Both of these have come down, with both food inflation and
real-estate price growth averaging low single digits during the last three years.
Rural wage growth has also come down to the 3-4% level from 10%+ seen prior
to inflation targeting.

Figure 12 Figure 13
Rural wage growth Residential property prices in top-seven* cities

20 (% YoY) 14 (% YoY)
Average pricing change across seven cities
18 12
16
10
14
12 8
10 6
8
4
6
2
4
2 0
0 (2)
Jan 12
May 12
Sep 12
Jan 13
May 13
Sep 13
Jan 14
May 14
Sep 14
Jan 15
May 15
Sep 15
Jan 16
May 16
Sep 16
Jan 17
May 17
Sep 17
Jan 18
Jun 12
Jun 13
Jun 14
Jun 15
Jun 16
Jun 17
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Source: CLSA, CMIE, Ministry of labour Source: CLSA, Cushman & Wakefield. *Mumbai, Delhi, Gurgaon, Bengaluru,
Pune, Hyderabad, Chennai
The GST transformation: Small businesses face disruption

Small businesses have India rolled out the Goods and Services Tax (GST) nationwide on 1 July 2017.
found it tough to cope with GST was not an additional tax, unlike in several other countries, and hence
the GST transformation inflation did not rise; however, it relies heavily on digital systems to work
smoothly. The tax initially started with a complicated monthly-returns filing
process with several anti-evasion measures, which were meant to substantially
increase tax compliance. There were subsequent substantial rollout issues that
led to several sectors facing severe disruption. Some small- and medium-sized
(SME) businesses have struggled to make the transition to a GST-based system,
leading to closures and job losses. The textile/garment export sector is one such
sector - garment exports declined by 11% YoY in the 12 months since rollout.
Figure 14
Declining garment exports, The trend in readymade garment exports

traditionally dominated by 40 (% YoY)
small units
30
20 Avg growth:
10 7.0%
0
(10)
Avg growth:
(20) (10.6%)
GST
(30) rollout
(40)
(50)
Sep 16
Dec 16
Apr 17
Sep 17
Dec 17
Apr 18
Aug 16
Aug 17
Jul 16
Oct 16
Nov 16
Jul 17
Oct 17
Nov 17
Feb 17
Mar 17
Feb 18
Mar 18
Jun 16
Jan 17
May 17
Jun 17
Jan 18
May 18
Jun 18
Source: CLSA, Ministry of commerce
The Insolvency and Bankruptcy code: Old order destabilised

Landmark IBC implemented The Insolvency and Bankruptcy Code (IBC) was implemented in December 2016.
from December 2016 It brought a drastic change upon India’s bankruptcy law. Earlier, long-drawn court
processes meant very few corporate defaults ever saw a resolution where control
was wrested from the owner. Under the IBC, loan-defaulting companies are
admitted into a bankruptcy procedure under an independent resolution

professional. The law was adopted partly in response to India’s large non-
performing loan (NPL) crisis, where banks were unable to clear out their bad
loans. The government and RBI action has forced banks to recognise NPLs as
their ratio went up, from 3.8% four years ago to 11.6% in FY18.
Figure 15
IBC process adoption led to Banks’ gross NPL ratio

acceleration in bad-debt (%)
14
recognition by banks
11.6
12
10 9.4
8 7.5
6
4.3
3.8
4
0
FY14 FY15 FY16 FY17 FY18
Source: RBI.
Bad loans and bankruptcies The first set of large loan resolutions under the IBC are happening in 1H18. While
have constrained both the code goes a long way in improving India’s bankruptcy procedure, one
corporates and lenders consequence has been that several large industrial houses have had to cede
control of a bulk of their assets. Also, with accelerated bad-loan recognition,
public-sector banks have been constrained to lend to a new set of borrowers.
This balance sheet clean-up has led to Indian corporates’ capex plans taking a
backseat, delaying capex-cycle recovery.
Figure 16
Weak capex cycle India’s GFCF as % of GDP
37 (% of GDP) (% of GDP) 37
GFCF as % GDP (Current) Tr-4 quarter (RHS)
35 35
33 33
31 31
29 29
27 27
25 25
Sep 12
Dec 12
Sep 13
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 12
Jun 13
Jun 14
Jun 15
Jun 16
Jun 17
Source: CLSA, MOSPI

Parliamentary efficiency improved under BJP rule

Under the current regime, parliament seems to have achieved (hours spent on actual work, compared to budgeted hours)
a lot more on the legislative front, particularly the passage of indicates lower-house productivity was 85% under NDA rule,
several landmark reforms: Rera, the GST and IBC. Success versus 60% under UPA-2 (United Progressive Alliance).
has come despite NDA-2 lacking a majority in Rajya Sabha Interestingly, under NDA-2, upper-house productivity (66%)
(upper house). Average parliament-session productivity was quite close to that of UPA-2.
Session-wise parliament productivity under Modi’s rule (lower and upper houses)
140 (%) Lok Sabha Rajya Sabha
120
100 Nirav Modi, AP/TN

state protests
disrupt parliament
80
60
40
Demonetisation
Lalit Modi, MP
20 disrupts parliament
medical issues
disrupt parliament
0
Budget Winter Budget Monsoon Winter Budget Monsoon Winter Budget Monsoon Winter Budget
2014 2014 2015 2015 2015 2016 2016 2016 2017 2017 2017 2018
Source: CLSA, Ministry of parliamentary affairs, PRS
The UPA-2 government faced the embarrassment of the 2G house. BJP faced no such trouble; additionally its clear
scam early in its tenure (late 2010), which led to the majority status in the lower house meant that one legislative
government facing major disruption as well as loss of alliance body kept functioning well and regularly sent bills to the
partners, effectively rendering it a minority in the lower other for passage.
Average parliamentary efficiency under previous (2009-14) and current (2014-July 2018) governments
90 (%) UPA (Budget 2009 - Winter 2013) NDA (Budget 2014 - Monsoon 2018)
80
70
BJP's clear majority in

60
Lok Sabha has kept
productivity high here;
50 However, its minority
85
status in Rajya Sabha has
40 been an issue
64 66
30 60
20
10
0
Lok Sabha Rajya Sabha
Source: CLSA, Ministry of parliamentary affairs, PRS

Real Estate Regulatory Act: Bringing order to chaos

Rera implementation has to India’s property sector saw volume and the pricing cycle peak around 2013. By
be state specific but still late 2015, customer complaints of delayed projects and broken developer
widely adopted promises were rife as companies struggled to complete projects on time and as
marketed. Parliament passed the Real Estate Regulatory Act (Rera) in 2016, going
national in June 2017. It is the first proper attempt to discipline developers by
curtailing the diversion of project cashflow and limiting the ability to market
projects without the correct approval. Rollout has seen initial significant sector-
volume contraction, with new launches in top-seven cities down to a multiyear
low, prolonging the property-construction sector downtrend, with implications
for job creations as well.
Figure 17
Real estate launches are Residential units launched in top-seven cities¹

down 60% from peak levels (No.)
300,000
250,000
200,000
150,000
100,000
50,000
0
2012 2013 2014 2015 2016 2017
Source: CLSA, REIS JLL. ¹ MMR, NCR, Bengaluru, Hyderabad, Pune, Chennai, Kolkata
Demonetisation: Much ado about nothing

Currency swap experiment - Demonetisation was a controversial major policy decision - on 8 November 2016,
a 2ppt loss in GDP growth the government announced a ban of around 86% of the Rs18.0tn currency in
pace for meagre gains
circulation. People had until the end of the year to deposit their paper money in
banks for replacement new notes. The intention - a substantial reduction in black
money at a degree of economic cost - was noble; however, despite poor
implementation, local ingenuity led to 98% of currency returning to banks.
Meanwhile, the economic consequences were high, with the GDP growth rate
dipping from 7.6% in the prior quarter (2QFY17) to a low of 5.6% in 1QFY18. The
unorganised economy, particularly in rural areas, took an extended time to
recover. The currency in circulation as of June 2018 was at Rs19.5tn, 8% higher
than before demonetisation. There has been some positive impact, however, with
increased income declarations resulting in higher income tax collections.

BJP unlikely to get a majority on its own

High concentration of seats BJP’s thumping victory in the last national poll came with a high concentration of
in a few states in 2014 seats in some states, and a limited or no presence in several others. It is unlikely
to repeat that performance in many of these states; the electoral dynamics in
many have changed materially since 2014, the key change being the loss of
certain alliances and the possibility of opposition parties’ consolidation. However,
the party is also likely to gain in other states where it had limited or no seats last
time round. These gains are likely to be much smaller than the prospective losses.
The strength of opposition unity remains key (see Section 2).
Figure 18
Likely scenario for BJP in the 2019 election
Decline of 8-35
-
States with BJP- Existing Possible
2014 seats due to anti- 2019
Congress direct fight allies new allies
incumbency
 Shiv Sena,  BJD - 20 seats
Net JDU, SAD and in 2014
loss of LJP, etc can
10-80 together  TRS - 11 seats
Decline of seats contribute in 2014
States where 26-53 seats 20-25 seats
opposition unity
can hurt BJP
- due to
opposition  Some discord
 Tamil Nadu
- total of 39
unity in BJP-Shiv seats in the
Sena relations state; new
282 of 200-270 though dynamics
543 seats seats emerging
States with weak

BJP in full
majority
BJP presence viz
southern states
+ Gain of
6-22 seats BJP in need
of allies
20-25 seats 30-40 seats
Source: CLSA, Government of India
We analyse next year’s election based on three kinds of region/states, in terms of

BJP’s positioning. The first is where it is in a direct fight with Congress; this is
where the party won 50% of its total seats in 2014, riding the wave of anti-
Congress sentiment. In some of these states, such as Gujarat and Rajasthan, it
won all the seats while near domination was also seen in MP, Chhattisgarh and, to
a lesser extent, Karnataka.
The second group is where BJP is a strong force but there are a host of other
parties, including Congress, and where opposition unity can do well. UP is the
main example of this. BJP got 135 seats, or 48% of its total tally, from these
states, benefitting from both anti-Congress sentiment and vote fragmentation
among several parties.
The third group is where BJP remains weak and the region is dominated by
regional parties or Congress - the four southern states other than Karnataka,
Odisha and West Bengal. BJP is likely to gain in West Bengal and Odisha, but
gains in the south are expected be marginal. BJP could look for possible allies
here in case of a seat shortfall.

Figure 19
Segregation of states (based on BJP presence and competition)
Type Key states BJP perf in 2014 Comments
 171, or 31% of total  Accounted for 50%  Vote swing from BJP will accrue
States with BJP- seats (140 seats) of BJP directly to Congress
Congress direct  MP, Karnataka, Gujarat, tally  Large vote swing will be negative for
fight Rajasthan, northeast,  BJP gained from BJP
Haryana, etc anti-Congress wave  Anti-incumbency can play against BJP
 Votes fragmented amongst various

 208, or 38% of total  Accounted for 48% parties
States where
seats (135) of BJP tally  Consolidation of parties can go
opposition unity
 UP, Maharashtra, Bihar,  BJP gained from against BJP
can hurt BJP
Assam, Punjab, etc fragmentation  Some allies can emerge for BJP in
case of shortfall
 164, or 30% of total

 BJP unlikely to make major progress
seats  Accounted for 2%
Regional parties on its own
 West Bengal, Andhra (7 seats) of BJP tally
and weak BJP  Major allies can come from these
Pradesh, Odisha, Kerala,
states in case of a BJP shortfall
Tamil Nadu, Telengana
Figure 20
BJP is weak in the south, Competition in elections (based on BJP presence)

West Bengal and Odisha
Jammu & Kashmir (6) States with BJP-Congress direct fight

States where opposition unity can hurt BJP
States with weak BJP presence
Himachal
Pradesh (4)
Punjab Uttarakhand
(13) (5)
Haryana
(10) Delhi (7) Sikkim Arunachal Pradesh (2)
(1)
Uttar Pradesh
Rajasthan (80) Assam (14)
(25) Nagaland
Bihar (40) (1)
Meghalaya
(2)
Manipur (2)
Jharkhand
(14) Tripura
Madhya Pradesh West Mizoram
Gujarat (26) (2)
(29) Chhattisgarh Bengal (1)
(11) (42)
Odisha
(21)
Maharashtra
(48)
Telangana
(17)
Andhra
Goa (2) Pradesh (25)
Karnataka
(28) Andaman & Nicobar Islands
(1)
Lakshwadeep (1)
Tamil Nadu
Kerala (39)
(20)
Source: Election Commission, CLSA; Figures in brackets are seats in the state in Lok Sabha

Figure 21
BJP seat forecasts for 2019 general election

State/region No. of BJP seats BJP seat range Comments
seats in 2014 in 2019
States with BJP-Congress direct fight
Madhya Pradesh 29 27 18-25 Anti-incumbency could drive some moderation over 2014
Karnataka 28 17 17-20 BJP remains most popular party, as seen in 2018 assembly elections
Gujarat 26 26 20-22 Some seat losses expected, as seen in 2017 assembly elections
Rajasthan 25 25 12-15 Anti-incumbency against local gov’t could weigh on national prospects
Jharkhand 14 12 8-10 BJP remains strong
Chhattisgarh 11 10 7-10 Some seats had close fights in 2014, which could drive some losses
North East ex- of Assam 11 1 5-7 BJP has gained significantly in the north east
Haryana 10 7 5-7 BJP remains strong
Uttarakhand 5 5 4-5 BJP won recently held assembly elections
Himachal Pradesh 4 4 3-4 BJP won recently held assembly elections
Other UTs and Goa 8 6 6-7
Segment total 171 140 105-132
States where opposition unity can hurt BJP
Uttar Pradesh 80 71 30-40 Consolidation amongst opposition parties likely to reduce BJP's tally
Maharashtra 48 23 15-23 Some moderation expected over 2014
Bihar 40 22 20-24 Alliance with JD (U) to keep BJP strong
Assam 14 7 8-10 Polarisation on recent illegal immigrants issue could help BJP
Punjab 13 2 2-3 BJP suffered losses in assembly polls; do not expect major gains
Delhi 7 7 5-6 Three-way fight could help BJP
Jammu & Kashmir 6 3 2-3 BJP remains strong in Jammu and Ladakh
States with weak BJP presence
West Bengal 42 2 5-10 BJP emerged as second biggest party in recent Panchayat polls
Tamil Nadu 39 1 2-5 Presence remains scant, some progress over 2014 expected
Andhra Pradesh 25 2 0-2 Breakup of alliance with TDP to hurt BJP
Odisha 21 1 4-8 Continues to make inroads; likely to improve tally over 2014
Kerala 20 0 1-2 Presence remains limited
Telangana 17 1 1-2 Limited BJP presence
Grand total 543 282 200-270
Eight key states could drive a 50+ seat reduction

Four states accounted for Madhya Pradesh, UP, Gujarat and Rajasthan accounted for 147 BJP seats in 2014,
52% of BJP’s seats . . . or 52% of all the seats it won - vote share in these four states amounted to 49%,
but accounted for 80% of seats. The party clearly gained from the “Modi wave”,
where he was able to swing significant vote share in his/BJP’s favour. Equally, the
splitting of non-BJP votes across several opposition parties helped, particularly in
UP and partially in MP. Combined with the other large four states of Maharashtra,
Jharkhand, Haryana and Chhattisgarh, the party won 201 out of 282 seats. A
potential vote-share swing, whether due to anti-incumbency or for other reasons,
could have a large overall impact.

Figure 22
. . . and 71% from eight BJP seats in its dominant states (2014 election)
states State No. of BJP BJP vote 2019 outlook
seats seats share
Uttar Pradesh 80 71 42.6 Opposition consolidation can impact
Maharashtra 48 23 27.6 BJP
Madhya Pradesh 29 27 54.8

Gujarat 26 26 60.1
Rajasthan 25 25 55.6 Anti-incumbency-led vote swing could
Jharkhand 14 12 40.7 hurt BJP
Chhattisgarh 11 10 49.7
Haryana 10 7 34.8
Total for these states 243 201
Total for India 543 282
Share of these states (%) 44.8 71.3
Some losses are likely in As can be seen in Figure 22, eight states accounted for 201, or 71%, of BJP’s
these states seats won in the last general election. Many were won with a large margin and
can be considered strongholds that the party is unlikely to lose. We did a simple
scenario analysis - if BJP’s vote share dropped by 5ppts, with those votes going to
the second-best candidate/party in that particular constituency, then its tally in
these eight states would fall by 39 seats. This analysis doesn’t include any impact
of opposition parties uniting. In Section 2, we discuss the impact of the
opposition combining, which is largely restricted to the state of UP, and how the
impact of SP, BSP and Congress uniting - even without a vote swing - could result
in a loss of 50 BJP seats. The obvious shortcoming of this analysis is that it
doesn’t take into account the impact and political inclinations of the estimated
10-12% more voters likely in 2019.
Figure 23
In 93 of these 201 wins, BJP Number of seats won by BJP in eight states (based on 2014 vote share)
vote share was less than 70 (No. of seats)
50% 64
60
50
44
40
33
31
30
21
20
10 8
0
0
>55% 50-55% 45-50% 40-45% 35-40% 30-35% <30%

Figure 24
More than 60 seats could Loss in BJP seats in eight states (assuming decline in BJP vote share & shift to the runner-up)
be lost if 7% of BJP votes (Seat loss over 2014)
70
go to the runner-up
62
60
50
39
40
30 26
20 17
11
10
0
-2% -3% -4% -5% -7%
Limited scope for gaining seats elsewhere

In states with 175 seats, Tamil Nadu, West Bengal, Kerala, Odisha, Andhra Pradesh, Telangana and the
BJP could win only eight north-east excluding Assam are among the states where the party had limited
success in 2014. Together they account for 175 of the 543 seats in Lok Sabha,
but Modi won only eight. The chance of a big tally increase appears limited as
BJP’s expansion here is still a work in progress.
Figure 25
States were BJP had limited success in 2014

State No. of 2014 BJP 2019 BJP Comment
seats seats expected seats
Telangana 17 1 1-2 Weak BJP presence. No major change expected
Odisha 21 1 4-8 BJP has gained recently
Kerala 20 0 1-2 BJP remains third-biggest party with c.15% vote share. Unlikely to see
material gains
Andhra Pradesh 25 2 0-2 Lost alliance partner TDP. Unlikely to win any seat on its own
Tamil Nadu 39 1 2-5 Remains weak. Scenario unlikely to change
West Bengal 42 2 5-10 With a 5-7% vote swing from winning party, gains could be 2-5 seats
North East ex-Assam 11 1 5-7 Based on recent performances
Total seats 175 8 18-36
BJP more hopeful of making BJP is expected to gain few seats in West Bengal. The party has moved to
inroads in West Bengal and second position in the state in recent local-body elections, ahead of CPM and
Odisha Congress. While the party won only two seats in 2014, it could win five to 10
seats next year.
Similarly, in Odisha - where the BJP had won only one of the 21 seats in 2014 -
the party has moved ahead of Congress and is likely to emerge as key competitor
to the main party, BJD. BJP could improve its tally in 2019 to 4-8 seats.

Figure 26
BJP performance in West Bengal, Odisha and Kerala

No. of 2014 GE seats by BJP Vote share (%) Seats with swing towards BJP over 2014
seats
2014 Latest state elections 5% 7%
West Bengal 42 2 18 10 3 7
Odisha 21 1 22 18 3 3
Kerala 20 0 10 15 1 1
Total 83 3 7 11
Targeting more seats in the The north east of India comprises eight states that are connected to the rest of
north east India via a small corridor in West Bengal called the Chicken’s Neck. Since these
states are sparsely populated and account for only for 25, or less than 5%, of the
total 543 seats, the region has not often received much electoral attention.
However, BJP, which has had scant presence of its own in the region, went all-
out in forming alliances and also expanding its own presence. Its partners now
have government in all states barring one - Mizoram, which goes to the polls in
December 2018. While the party and its allies won 11 of the 25 seats in 2014, it
will try to increase that number further next year.
Figure 27
BJP performance in north-eastern-states’ assembly elections

State Total seats BJP seats BJP current Current state government
in Lok Sabha in 2014 ally seats
Arunachal Pradesh 2 1 0 BJP-led alliance
Assam 14 7 0 BJP-led alliance
Manipur 2 0 0 BJP-led alliance
Meghalaya 2 0 1 BJP as part of a bigger alliance
Mizoram 1 0 0 Congress
Nagaland 1 0 1 BJP as part of a bigger alliance
Sikkim 1 0 1 Sikkim Democratic Front, part of NDA
Tripura 2 0 0 BJP on its own
Total seats 25 8 3
May have to depend more on allies . . .

Unlikely to get majority on On its own, BJP is unlikely to reach 272 seats - the number required to form an
its own absolute-majority government in 2019 as it did in 2014. Based on how big the
shortfall is, the party will have to tap into potential non-NDA allies. Based on our
analysis, it appears to be facing a decline of up to 60 seats purely from opponents
consolidating in some states, balanced against marginal gains in a few others.
Anti-BJP alliance gaining The coming together of several regional parties with Congress to form an alliance
traction has gathered significant momentum; BJP’s search for new coalition partners is not
an easy task.
There are some regional Our regional-party analysis suggests that other than current NDA allies, there are
parties that can ally with six parties - together winning 85 seats in 2014 - that could possibly ally with BJP
BJP if needed if the need arises. It will have to accommodate these allies with ministerial berths,
etc; the biggest block is the 37 seats from AIADMK, whose main leader, J
Jayalalithaa, died last year. The party has been in a leadership crisis since then,
with continued factionalism, and it is unlikely it will repeat its performance in
2019, despite its closeness to BJP.

Due to its absolute majority in the 2014 election, BJP was not dependent on any
ally in the lower house. Many of the party’s alliance partners - under the banner
of NDA - have complained of neglect. TDP left the alliance in 2018, while another
ally, Shiv Sena in the state of Maharashtra, has been at loggerheads with Modi’s
party and fought the October 2014 state elections on its own. In Bihar, JD (U) has
expressed discontent over seat-sharing but there is a truce, according to media
reports. An alliance with PDP in Jammu and Kashmir ended in June, leading to
‘governor’s rule’.
Figure 28
Major NDA partners (including some that have recently left)
Current Seats won

Party/leader Party
scenario in 2014
Shiv Sena
 Vocal critic of BJP and its policies Remains a part
 Fought Maha state elections alone of NDA as of 18
 Has been threatening to leave NDA now
TDP  Continued to demand special status

for his state (Andhra) Left NDA in
16
 Left NDA in 2018; has been vocal 2018
against BJP since
PDP
 Joined BJP alliance in late 2014
Out of alliance
 Differences persisted between BJP 3
since 2018
and PDP over policies in J&K
JD(U)  Broke from NDA in 2014

 Rejoined in Jul-17, formed
Remains an ally 2
government in Bihar with BJP
 Some discord over seat-sharing
SAD
 Oldest ally of BJP
Remains an ally 4
 Will remain key ally in 2019
LJP
 Was ally in Vajpayee government
Remains an ally 4
 Will remain key ally in 2019
Source: CLSA, Webman25, Hemshah171095, RaviC, Shivam Setu, Sanyam Bahga, Maharashtrapolipics
. . . especially in the south

Limited success in weaker BJP’s performance in West Bengal, Odisha and southern India states, which
regions for BJP in 2014 together contribute 193 of the 543 seats in the Lok Sabha, or 36% of total seats,
contributed only 8.5% of BJP’s tally of 282 seats in 2014. The bulk of these seats
came from Karnataka, a state where it had already been in power. There has been
no significant progress in performance in any of these states’ elections since then.

Figure 29
The south, Odisha and West BJP performance in 2014 general election (southern states, Odisha and West Bengal)
Bengal accounted for only No. of Lok 2014 BJP 2014 BJP Comments
24 of BJP’s seats in 2014 Sabha seats seats vote share (%)
Andhra 25 2 8.5 BJP was in an alliance with TDP, a local party but
Pradesh parted ways in 2018
Karnataka 28 17 43 BJP was single largest party in 2018 state elections
Kerala 20 0 10.3 Increased vote share to 15% in 2016 state
elections; won only 1 out of 140 assembly seats
Puducherry 1 0 0
Tamil Nadu 39 1 5.5 Dominated by regional parties. BJP has no
significant formal allies though AIADMK voted for
NDA in a recent no-confidence motion and Rajya
Sabha deputy-chairman polls
Telangana 17 1 8.5 Dominated by regional parties. BJP has no formal
allies though TRS voted for NDA deputy-chairman
nominee
Odisha 21 1 21.5 BJP well behind regional party BJD in 2014 state
elections; some progress in local-body elections;
BJD voted for NDA deputy-chairman nominee
West 42 2 10.9 BJP finished fourth with 10% of vote in 2016 state
Bengal elections
Total 193 24
Tamil Nadu politics: Leadership vacuum to benefit BJP?

Of all the major states that could throw a to Modi’s party, voting with BJP in a recent no-confidence
surprise in 2019, Tamil Nadu is perhaps at motion in Lok Sabha.
the top with 39 Lok Sabha seats. It has long
preferred local Dravidian parties in elections. The recent death of M Karunanidhi at the age of 94 means
The genesis of this local-party preference his son MK Stalin is expected to lead the party, although he
lies in anti-Hindi agitation that started has had a fractious relationship with his brother MK Alagiri
before independence, gathering impetus in and confrontations between the two cannot be ruled out.
the 1960s as the date approached when Whether Stalin has the same charisma as his father is
Delhi would recognise Hindi as India’s official language. The untested. Nonetheless, DMK is expected to maintain its
agitation also took a secessionist colour, which eventually proximity to Congress, which has been the case since 2004.
died down after the 1962 Sino-India War.
As the two main parties have weakened, two
While Hindi never became the sole official new players have appeared - Rajinikant and
language, the agitation propelled DMK to Kamal Hasan; again, both of them are from
the mainstream of Tamil politics and ended the Tamil film industry. Rajinikanth is a
Congress’s hold in the state in 1967. Since popular actor across India but is particularly
then the state has seen only the two local famous in Tamil Nadu, enjoying cult status.
parties, AIADMK and DMK, in power. The He announced his entry into the political
two-party culture has revolved around arena in December 2017, along with plans to
personalities coming from the Tamil movie contest all the seats in the next state elections, although his
industry. The leader of DMK, M Karunanidhi, was a plans for the 2019 general elections are not clear. There had
screenwriter, while founder of AIADMK, MG Ramachandran been rumours for decades that he would enter - some believe
(MGR), was a celebrated actor. After MGR’s death, J he is starting too late. Kamal Hassan is also a well-known
Jayalalithaa, a popular Tamil actress, took over the party in actor, particularly in Tamil Nadu, and he unveiled his party,
1989. Since then, power alternated between the two before Makkal Needhi Maiam, in February 2018.
AIADMK retained the power in the 2016 state elections,
having swept the 2014 national elections, getting 37 of the It will be interesting to see how the state
39 seats, with DMK drawing a blank. votes in 2019. BJP will also be keenly
looking at the developments given it has
The political scenario has changed dramatically in the last little presence in the state, winning a single
two years, however; the death of J Jayalalithaa in December seat in 2014. The quantum of seats (7% of
2016 left the party in complete disarray, with up to three the total) make it a hunting ground to find
different factions fighting for control. It has also grown closer allies if required.

Non-NDA parties that can We underline some of the regional non-NDA parties that can ally with Modi in case
support BJP if needed he requires their support. YSR Congress, AIADMK, TRS, BJD and NCP are the key
parties. YSRC leader Jagan Reddy has a fractious relationship with Congress and is
currently not allied with any party. He has been vocal against BJP over the non-
granting of special state status to Andhra Pradesh, reducing the possibility of a pre-
poll alliance, although a post-poll alliance appears likely.
AIADMK has had up to three factions since the death of Jayalalithaa. The leaders
have openly said that Modi has been guiding them to stay together; however,
performance is expected to dip sharply in 2019.
BJD was in alliance with BJP until 2009, but has held the state on its own since
AIADMK is onside but the then. With Congress’s presence declining, the two parties are now pitted against
death of Jayalalitha has
each other. BJD has never allied with Congress - in the event of a shortfall,
weakened the party
supporting BJP cannot be ruled out.
TRS was part of NDA-1 regime and recently (July 2018) voted for BJP in the no-
confidence motion. The party’s chief recently said it could enter a post-poll
TRS and BJP appear to be alliance with BJP after the 2019 election.
post-poll candidates for BJP
NCP has usually allied with Congress but in case of a shortfall could support BJP.
There was also earlier talk of NCP willing to support BJP in Maharashtra.
Figure 30
Possible BJP coalition partners
Presence in Seats won

Leader Party
state in 2014
Andhra
YSR Congress Pradesh,
 Not allied with any party Telangana 9
currently accounting for
42 LS seats
AIADMK Tamil Nadu

 Performance likely to dip accounting 39
after death of J. Jayalalitha for 39 seats
BJD
Odisha
 Was in alliance with BJP accounting 20
several years ago. Currently for 21 seats
not aligned with any party
NCP
 Was with Congress alliance Maharashtra
in previous governments accounting 6
 Softer towards BJP vs other for 48 seats
opposition parties
TRS
Telangana
 Was earlier with NDA
accounting 11
 Abstained in no-confidence for 17 seats
vote against BJP
Source: CLSA, Government of Odisha, US state department, Sakshi, Prakashfotos, Srinath66

How many seats does the BJP need to form a government?

We look at the various scenarios and where BJP could find the required seats:
 240+ seats - BJP should sail through. The required 30-odd seats should largely
come from current allies, such as JD (U), Shiv Sena and LJP.
 221-240 seats - BJP will most likely have to look for allies outside of NDA.
Potential alliances with TRS, YSRC, BJD and AIADMK could fill the shortfall.
Less than 220 seats reduces  200-220 seats - Probability of a BJP-led government is low. Modi may have to
the likelihood of a BJP go to the list of parties aside from the parties from the south India as
government mentioned above. Some of these groups, such as JDS and BSP, have been
allies before and, with right kind of ministerial berths, etc, and other
concessions, could be again. In this scenario, a third front or Congress-led
coalition may also be a lure for these parties.
 Less than 200 seats - A BJP tally below 200 would imply that Congress and its
UPA allies have a similar or higher number. A third front or Congress-led
coalition would be in a much better position to form the government. Modi
would be unable to muster the required support.
Figure 31
More than 220 seats for Likelihood of BJP government under different scenarios
BJP means a good chance of
BJP tally BJP gov’t
a BJP government Likely allies
in 2019 likelihood
 Support from NDA allies -

240+ Almost
Shiv Sena, LJP, JD (U), SAD -
seats certain
should suffice
 NDA allies, as above

221-240 Medium +
seats to high  Support from YSRC, AIADMK,
TRS, BJD, etc should suffice
 Other than above, BJP will

200-220 need support from parties like
Low
seats JD (S), NCP, BSP, etc, which
will be difficult.
 Getting a support of allies with

<200
Improbable 70+ seats will be difficult for
seats
BJP.
Source: CLSA
BJP’s focus on more ‘popular’ schemes may drive some gains

The above discussion has focussed on the impact of anti-incumbency impact and
political alliances. However, we recognize that the popularity of Modi is intact
and his leadership is associated with several popular schemes as well. Given
Modi’s good campaigning abilities too; it may be possible to restrict the anti-
incumbency impact to an extent.
Tough decisions balanced Apart from the disruptive changes that Modi has brought, there are also a few
by well-implemented significant policies that essentially target the most deprived sections of society.
popular schemes Much attention has been paid to improving government-service delivery,
including PMJDY, Pmay, Power for All, DBT and Ujjwala scheme.

Several schemes affect over More recently, the government has taken a decisive pro rural stance, with farm
100m people loan waivers (at the state level), steeper MSP hikes and announcing the launch of
the Ayushman Bharat (AB) scheme that provides health insurance to 500m poor
individuals. Some schemes are still being implemented and their impact on the
electorate has yet to be seen.
Figure 32
Summary of key popular government schemes
Key gov’t schemes Logo Key objectives/achievement

PMJDY  Improve financial access, coverage
(financial inclusion)  300m+ no-frills bank accounts opened since August 2015
PAHAL/Ujjwala  Subsidy reductions through better targeting

(DBT)  40m+ new household get new subsidised cooking-gas connections
 Provide housing for all Indians by 2022

Housing for all  10m+ rural and urban homes built so far
 Broad scheme targeting sanitation and health

Clean India  50m+ toilets built across India through government assistance
 Provide electricity connections to all villages and households

Power for all  All villages electrified already; household electrification seeing push now
Mudra  Provide funding to small businesses for employment and income creation
(small entrepreneur loans)  Rs6tn+ of loans to 130m+ beneficiaries since FY16
National health  Provide Rs0.5m/pa healthcare coverage to 500m people

protection mission  Scheme to be launched in 2H18
BJP leaders
Piyush Goyal (54) currently heads the railway government and also served as BJP president over 2010-13.
ministry. He is an upper-house member from He is a key link between BJP and RSS.
Maharashtra. Goyal assumed the office of
Minister of State with Independent Charge of Amit Shah (54) is current party president and
Power, Coal, New and Renewable Energy in an upper-house MP. He comes from the state
2014. He then also assumed responsibility for of Gujarat and was a minister in the state
the Ministry of Mines in 2017. He government under Modi’s chief ministership.
spearheaded one of the key schemes to He comes from RSS and joined BJP’s youth
electrify all villages by December 2018. This wing in 1986, gaining prominence at the
project was completed before time, in April 2018. He also national level in 2014 when, under his charge,
rolled out the Uday power-sector reform, was credited in the it won 71 of the 80 seats in UP. The massive
coal ministry for successfully e-auctioning mines and ramped victory was integral to BJP gaining a majority in the state. He
up Coal India’s production. In September 2017, Goyal assumed has since then become the party’s “chief strategist” and has
the railway portfolio and retained the coal ministry. In May delivered several wins in state elections.
2018, he assumed additional responsibility as Minister of
Finance and Corporate Affairs in the absence of Arun Jaitley, Arun Jaitley (65) is the current finance and
who is recovering after a kidney transplant. Goyal is expected corporate affairs minister in the government.
to remain a key BJP figure in the coming years. He is a member from the Upper House of the
Parliament. He is a well-known lawyer and
Nitin Gadkari (61) is the Minister of Road was a senior advocate in the Supreme Court.
Transport & Highways, Shipping and Water Jaitley has been associated with the BJP’s
Resources, River Development and Ganga student wing since 1980, holding different
Rejuvenation. A member of the lower house, ministries under the Vajpayee government
he has been involved with RSS, BJP’s parent from 1999-2004. He briefly held the defence ministry in the
organisation, and comes from Nagpur, RSS’s earlier period of this Modi administration, and again when
headquarters. Gadkari has been a BJP Manohar Parrikar resigned. Currently recovering from a
member since the party’s inception in 1980. kidney transplant, he is expected to take over the finance
He was a minister in the Maharashtra ministry again shortly from interim minister, Piyush Goyal.

Housing for All: The big promise

Housing for All targets In a bid to reduce India’s housing shortage, particularly at the lower end, Modi
construction of 30m rural launched an ambitious ‘Housing for All by 2022’ scheme. The scheme was broken
and 12m urban homes by into two parts: Pmay rural and Pmay urban. Both schemes have separate targets,
2022
ministries, budgets and models for boosting affordable/social housing.
The scheme ran as IAY till Pmay rural targets the construction of c.30m houses in rural areas by 2022, and is
FY15 essentially a souped-up version of the previous government’s IAY (Indira Awas
Yojana) scheme. A direct subsidy is provided to the beneficiary as construction
assistance. Use of technology, such as geotagging of assets, online monitoring of
grant disbursals, DBT, have been combined to implement the scheme. Between
FY16-18, 9.5m houses were constructed under Pmay rural.
Figure 33
In 2015/FY16, Modi Houses completed under the Pmay rural scheme (annually)
announced Pmay rural
would construct 30m rural (m)
5.0
houses by 2022
4.4
4.5
4.0
3.5 3.2
3.0
2.5
2.0 1.8
1.5 1.2
1.0
0.5
0.0
FY15 FY16 FY17 FY18
Source: CLSA, Ministry of Rural development
Innovations like CLSS are Alongside its rural housing programme, the government also started a Pmay urban
helping drive Pmay urban scheme, which is much more complicated as here coordination with the state
level/local level bodies and/or the direct beneficiary is needed to pass on the
benefits. The government has created multiple options, including a direct cost
reduction for the urban unit and the popular CLSS (credit-linked subsidy scheme),
an interest subvention initiative. The target is to complete around 12m houses by
2022. It took some time to scale up as projects were approved, launched and
construction started. By June 2018, Delhi had approved 5.1m houses and 2.8m
had seen construction starts; nearly 0.8m were already completed.

Figure 34
Initial target is to at least Progress of Pmay urban

approve all 12m houses in (m)
6
the next 12 months Pmay - Urban houses sanctioned Construction started Completed
5.1
5
4.6
4.1
4 3.7
2.9
3 2.8
2.4
2.1
1.9
2 1.7
1.8
1.5
1.2
1.0
1 0.7 0.8
0.4
0.3 0.3
0.2 0.2 0.2
0.1
0.0
0
Jan 17 Apr 17 Jul 17 Sep 17 Jan 18 Mar 18 May 18 Jun 18
Source: CLSA, Ministry of housing and urban development
Easy loans for creating jobs

Scheme to promote As part of the improved overall financial inclusion, the prime minister launched a
collateral free microloans scheme to boost loan availability to the small business/entrepreneur section.
for job-creation purposes
Pradhan Mantri Mudra Yojana (PMMY), an easy-loan scheme for entrepreneurs,
was started in April 2015. Loans ranging from Rs50,000-Rs1.0m are provided by
various financial institutions, including banks, for the purpose of funding
small/new businesses. These loans are eligible for refinancing by the newly
established Micro Units Development and Refinance Agency (Mudra), which
underwrites part of the credit risk. These loans are collateral free. A first charge
for loan security is created on assets from the loan proceeds.
Figure 35
With FY16 being the Mudra loans sanctioned and disbursement amount
starting year, Mudra loans (m) (Rstn)
60 3.0
have seen a strong offtake No. of PMMY loans sanchtioned Amount disbursed (RHS)
50 2.5
40 2.0
30 1.5
20 1.0
10 0.5
0 0.0
FY16 FY17 FY18 Apr-Jul 2018
Source: CLSA, Mudra Organisation

Small ticket size loan is Mudra loans have seen high demand since the scheme started in April 2015, with
quite popular 134m loans disbursed for a total amount of Rs6.1tn. We note that since part of
the scheme was also present earlier (minus the ‘Mudra’ branding), it is hard to
gauge new loan demand created by the scheme. Ticket sizes have been small,
with an average disbursal size of Rs46,000 and 92% of loans (by number) in the
Rs50,000 category; 74% of borrowers are women. As of March 2018, Mudra
loans’ NPA ratio was around 4.2%.
The rural shift

No longer an urban party The government has made a significant rural push, done partly to ameliorate the
perception of BJP being a more urban party. Early on, the prime minister started a
small number of farm/rural-focussed initiatives, such as a scheme in February
2015 that saw 148m soil health cards (mapping nutrients in the soil and their
fertiliser requirements) dispatched. By April 2016, a committee had been set up
to double farm incomes over five years (2017-22). Most rural programmes’
targets are the same now - higher production, lower input costs and higher
output prices. Beginning in the 2017 summer cropping season, Modi also
launched a souped-up agri-insurance scheme that covers up to 50% of farm
output via subsidised premiums.
Figure 36
Modi’s umbrella scheme will Government schemes to boost rural incomes

‘double farm income’ by
2022 Key rural scheme Started from Description
Doubling farmer  Umbrella scheme to double farmers income over 2017-22
2016
income  Target to reduce cost, raise productivity, improve realisations
Soil health  To assess and provide correct nutrients to soil

2015
card  147m soil health cards issued by 2018
Agri  To provide insurance cover to crops against natural disasters

2017
insurance  50% of farmers targeted at subsidised insurance premiums
Farm loan  Loans taken by small farmers waived up to certain limit

2017
waivers  State-specific step but has reached around US$25bn
Higher  Guarantee to give 50% margin on crops

2018
MSPs  Up to 50% hike in government purchase price for crops
Source: CLSA
Farm loan waivers up to Most of the above-described schemes are longer-term by nature; however, the
US$25bn announced by main attempt to woo farmers was made ahead of the UP government elections in
various state governments
2017, when Modi announced state-wide farm loan waivers. This does not impact
central government financials as states bear the burden. Nonetheless, the prime
minister’s waiver announcement in UP triggered several such demands
nationwide, with BJP-ruled states like Maharashtra and MP, as well as non BJP
states - Punjab, Tamil Nadu and Karnataka - forced to follow suit. There has been
around US$25bn of waivers announced over the last c.18 months.
At least 50% crop margin The waivers have not proved enough to calm farmer protests in parts of the
has resulted in highest crop country, which have essentially emanated from low agri-produce inflation. In an
price hikes in six years attempt to raise output prices and increase farmers’ incomes, Modi promised a
50% margin on all crops’ input prices. This is being implemented by a minimum
support price (MSP; a government purchase-price guarantee), from the 2018
summer-crop season. Consequently, the benchmark paddy crop saw its first

double-digit price hike in six years, and several crops have seen price hikes of
over 20%. Implementation of this scheme will be a challenge and farmers’ in-the-
hand income at the end of this year’s summer cropping season (usually money
received in 1Q19) could be important for BJP’s 2019 election prospects.
Figure 37
Paddy MSP hike is the Rice MSP trends

largest in six years (% YoY)
25
20
15
21
10 20
16
13
11 11
5 9 8
5 5
4 4 4 4 4 4
2 2
0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
BJP Congress BJP
Source: Ministry of Agriculture and Farmers Welfare, CLSA
BJP’s organisational edge

Aided by its parent, RSS, a social organisation known for its across various states. He is known to be a taskmaster and
feet-on-ground across India, BJP is known for its continuously travels across states to prepare election
organisational capability. Media reports indicate that RSS strategies.
has more than 5m members; those on the ground are
responsible for mapping all the voters in voting booths and These advantages have not only won tight electoral contests
ensure good turnouts. This presence helps the party - in cases of hung parliaments, BJP’s unmatched ability to
understand its strengths and weakness in different stich post-poll alliances surprised the opposition. In spite of
constituencies, issues to be raised in rallies and whether being second to Congress in the Goa and Manipur state
allies are required on not. This level of insight is unlikely to elections, BJP formed governments in both states by forming
be available to any other party in India, including Congress, alliances with local parties. Even in the state of Meghalaya,
which does not have this kind of presence on the ground. BJP, with only two seats versus Congress’s 21, was able to
The other distinct advantage that BJP has is Amit Shah, its convince local parties to create a ruling coalition. In the state
main strategist and president. He was credited for the big of Karnataka, however, BJP could not repeat its magic and in
win in UP in 2014, when the party won 71 out of 80 seats. spite of being the single largest party, Congress formed the
Since then his strategies have been instrumental in wins government in post-poll alliance with JD (S).
Recent hung parliaments where BJP formed a government

State Election Total seats in Verdict Single BJP Congress Government
date state assembly largest party seats seats
Manipur Mar-17 60 Hung Congress 21 28 BJP and smaller-party coalition form
government
Goa Feb-17 40 Hung Congress 13 17 BJP and smaller-party coalition form
government
Meghalaya Feb-18 60 Hung Congress 2 21 BJP and regional-party coalition form
government

Ups and downs - The past 20 years under NDA and UPA rule*
Figure 38
Growth has improved under Real GDP growth rate

NDA-2 versus UPA-2 rule 12 (%)
10.3
9.8
10 9.3 9.3
8.5 8.5 8.2
7.9 7.9
8 7.4 7.1 7.4
6.7
6.2 6.4
6 4.9
5.5 5.5
4.1 4.0 3.9 3.9

4
FY19BE
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
NDA1 UPA1 UPA2 NDA2
Source: CLSA, Government of India. *NDA is National Democratic Alliance, a BJP-led coalition. UPA is United
Progressive Alliance, a Congress-led coalition
Figure 39
Modi has successfully Consumer price inflation (CPI)*

curtailed inflation 14 (%) 13.1
12.4
12
10.5
10.1
10 9.1 9.4
8.4
8 6.8 6.7
6.2
5.8
6 4.9 4.9
4.3 4.4 4.5
3.8 4.0 3.9 3.8 3.6
4 3.4
2
0
FY19BE
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
NDA1 UPA1 UPA2 NDA2
Source: CLSA, Government of India. *CPI-IW used as CPI proxy for years before FY12
Figure 40
Fiscal deficit also lower Central government’s fiscal deficit as % of GDP

than UPA-2 but some slip- 8 (%)
up in FY18 from GST launch 6.8
7 6.5 6.4 6.6
6.1 6.0 6.2
5.9
6 5.7
4.7 4.9
5 4.3
4.6 4.5
4.2 4.1
3.9
4 3.6 3.5 3.5 3.3
3 2.8
2
1
0
FY19BE
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
NDA1 UPA1 UPA2 NDA2


Figure 41
An end to fuel subsidies Subsidies as % of GDP

have helped pare down 3.0 (%)
subsidy budget 2.6
2.4 2.5
2.5 2.3 2.3 2.3
2.1
2.0 1.9 1.8
1.7
1.5 1.5 1.5 1.5
1.4 1.4 1.5
1.5 1.3
1.4 1.3 1.3 1.4
1.0
0.5
0.0
FY19BE
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
NDA1 UPA1 UPA2 NDA2
Figure 42
With crude oil prices rising, Current-account deficit as % of GDP

CAD has started slipping 6 (%)
from FY18 4.8
5 4.3
4
2.9 2.9
3 2.4 2.5
1.9
2 1.4 1.3 1.4
1.7
1.3
1.0 1.1 1.1 1.0
1 0.6
0.4 0.6
0
(1) (0.8)
(1.3)
(2)
(2.4)
(3)
FY19BE
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
NDA1 UPA1 UPA2 NDA2 FY18

Figure 43
Over FY15-17, FDI was Net FDI as % of GDP

higher than CAD 2.0 (%) 1.9
1.8 1.7
1.6 1.6
1.6
1.4 1.4
1.4 1.3
1.2 1.2 1.2
1.2 1.1
1.0
1.0 0.9 0.9
0.8 0.7 0.7

0.6 0.7
0.6
0.6 0.5
0.4 0.4
0.4
0.2
0.0
FY19BE
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
NDA1 UPA1 UPA2 NDA2


Figure 44
Modi’s scorecard
Measure Impact Outcome

Consumer price inflation halves; consequent positive
Inflation targeting real rates trigger jump in financial savings
Corporate bankruptcies happen for the first time in

NPL resolution India, though process sees some legal hurdles
Substantial simplification of indirect taxes; anti-evasion

GST
measures yet to be tightened
Opening up 300m+ bank accounts substantially boosts

Financial inclusion
formal financial system access across India
Deregulation of auto-fuel prices, DBT mechanism a

Subsidy reduction
positive; food/farm subsidy bill sees expansion
Substantial process easing, digitisation of processes;

Ease of business
However major labour and land reforms elusive
Real estate sees regulatory body for first time; push for
Rera
affordable housing; long-duration programme
Some improvement in formalised economy but

Demonetisation
economic disruption lasted about a year
Attempts to sell Air India and IDBI; new PSU IPOs

PSU disinvestment
brought; PSU crossholding an issue
Capex cycle GFCF as % of GDP is at more than decade-low levels
Source: CLSA

Section 2: Can the opposition stand united? India strategy
Can the opposition stand united?

Opposition alliance in the Several non-BJP parties are attempting to form a coalition to defeat Modi. Early
state of UP holds the key success seen in some states, such as Uttar Pradesh and Karnataka, may help build
momentum. The real test will come ahead of the election, at the time of seat-
sharing. If the opposition parties can successfully field common candidates in
certain states, particularly UP, the numbers could tilt away from BJP.
Coalition governments have India is no stranger to coalitions, which were the norm in 1984-2014 - until
a reasonable track record Modi’s emphatic win. Congress- or BJP-led alliances have been stable and lasted
their full terms. Although a common perception is that when formed by a large
number of parties, they may be unstable and real reforms difficult to pass, the
experience of 1996-98 - when the Indian market outperforming and fundamental
reforms took place - isn’t the case. While growth trajectories may remain largely
unchanged, a weak coalition government will certainly impact investor sentiment.
Figure 45
India’s key regional parties and influential states¹

JKPDP (3)
Jammu & Kashmir

JKNC (0) SP (7) BSP (0) JD (U) (2) AGP (0)
SAD (4) Himachal

Pradesh RJD (4)
Punjab
Uttarakhand
AAP (4) Haryana

Delhi
Sikkim
Arunachal Pradesh
Uttar Pradesh
Rajasthan
Assam
Nagaland
Bihar Meghalaya
Manipur
Jharkhand Tripura
Madhya Pradesh West Mizoram
Gujarat Bengal
Chhattisgarh
Orissa
NCP (6)
Maharashtra
TMC (34)
SS (18)
Telangana
TRS (11) BJD (20)
Andhra
TDP (6)
Pradesh
Goa
Karnataka
YSR (9)
Andaman & Nicobar Islands
Lakshwadeep DMK (0)
Tamil Nadu
Kerala
AIADMK (37)
Left (5)
Source: Election Commission, CLSA. ¹Numbers in bracket represent seats won in the 2014 general election

Several opposition parties have weakened considerably

BJP’s large majority in 2014 and wins in subsequent state elections have created
an existential crisis within several of its opponents. Congress has seen its seats
decline sharply in most states and at a national level, while regional parties like
BSP, SP and NCP have seen losses in their respective regions. BJP’s rise reduced
BSP’s tally to zero in the 2014 election, in spite of it winning 4% (20% of votes in
UP) of the overall vote.
Figure 46
Opposition parties saw Select opposition parties’ seats in the previous two general elections
sharp declines in 2014 (Seats)
250
2009 general election 2014 general election
206
200
150
100
44
50
23 21
16
9 9 6
5 5 4 4 2 2
0 0
0
Congress SP BSP CPM NCP RLD RJD JMM
In many states where regional parties are also present, Congress has generally
lost vote share, while BJP has gained at its expense, reducing the former’s
foothold in several multiparty states. Most intriguing has been its declining share,
from 37% to 2%, in Tripura. BJP captured all of it and formed the state
government, forcing Congress and smaller opposition parties to unite and field
joint candidates wherever possible, with occasional success.
Figure 47
BJP has eaten into Share of vote in select state elections

Congress’s vote in many Vote share Latest state election Previous state election Change in vote share (%)
states (%)
BJP Congress BJP Congress BJP Congress
Uttar Pradesh 40 6 15 12 +25 (5)
Bihar 24 7 16 8 +8 (2)
Maharashtra 28 18 14 21 +14 (3)
Odisha 18 26 15 29 +3 (3)
West Bengal 10 12 4 9 +6 +3
Tripura 52 2 2 37 +50 (35)


Opposition tie-ups in 2019 can reduce BJP seats

Opposition parties already As several opponents have been pushed to the wall by BJP’s electoral onslaught,
trying out “joint opposition” there have been unification attempts among these parties - including some that
model were once considered incapable of coming together. First, in the state of Bihar,
RJD and JDU - two staunch opponents - united to defeat BJP in November 2015.
BJP’s share of the vote declined by nearly 4ppts, from 29% in the 2014 general
election to 25% in the 2015 state elections. But they saw a large decline in seats
(80% seats for BJP-led NDA in 2014 vs 24% in 2015). This, however, didn’t end
well - JDU split in July 2017 and eventually joined BJP to form the government.
Recently in UP by-elections, three opposition parties comprising SP, Bahujan

Samajwadi Party (BSP) and Congress fought together against BJP, the alliance
winning all three seats in what was considered a Modi stronghold. During the
2017 state elections, SP and Congress united but to no avail. BSP - which won 19
seats and a solid 22% of the vote - did not join them and BJP won 325 seats and a
41% share, as shown in Figure 48.
Figure 48
Congress + SP united for Trend in seat and vote share (Uttar Pradesh)
2017 state elections but Party 2012 state elections 2014 general election 2017 state elections
failed to defeat BJP . . .
Seats Vote share (%) Seats Vote share (%) Seats Vote share (%)
BJP & allies 47 15 73 43 325 41
SP 224 29 5 22
56 28
Congress 28 12 2 7
BSP 80 26 0 20 19 22
Others 24 18 0 7 3 8
Total 403 100 80 100 403 100
Source: Election Commission of India.
Figure 49
. . . but that outcome Recent Lok Sabha by-polls

changed during recent by- Seat State Winner BJP vote Comment
polls as SP tied up with BSP share (%)
2014 2018 2014 2018
Kairana UP BJP RLD 51 47 RLD candidate was a joint
opposition candidate
Phulpur UP BJP SP 52 39 BSP and SP were together
Gorakhpur UP BJP SP 52 47 BSP and SP were together
Understanding among Uttar Pradesh’s by-poll results show an understanding between opposition parties
SP and BSP can work, as they took all the three available seats from BJP. Congress has been
will be crucial . . . willing to play second fiddle in the state to the more established SP and BSP. At
one time, this two-party alliance was unthinkable, but when Akhilesh Yadav took
control of SP after a bitter family feud, it is more open to alliances. Mayawati
would like to avert a repeat of 2014, when her party drew a blank in the general
election.
. . . but a seat-sharing The bigger challenge will be seat sharing ahead of the 2019 general election. To
agreement may be a agree this in a three-seat by-election is easy when the next election is less than a
challenge year away. But to reach an understanding for the 2019 election may not be so
simple, and there have been instances in the past where this issue has caused
alliances to break down.

Figure 50 Figure 51
BSP leader Mayawati with Congress leader Sonia Gandhi BSP Leader Mayawati and SP leader Akhilesh Yadav
Source: ABP Live Source: Samajwadi Party
Uttar Pradesh holds the key to BJP’s success

Being the most politically important state, with 15% of all the of Gujarat and the other in Varanasi, another holy city for
seats, UP cannot be ignored in any national election. For BJP, Hindus in eastern UP. Voters appreciated the gesture and
it is a key swing state that contributed 25% to its 2014 tally BJP swept UP in not only the general election but in the
and 37% to the incremental seats it won in the 2014 election. 2017 state elections as well.
BJP’s fortunes took an upturn following its Ram Mandir Congress has not focussed on UP, in terms of seats, for over
campaign in 1990, which revolved around constructing a a generation now, although the state remains somewhat
temple at the site of a mosque in the holy city of Ayodhya, symbolic. The party won just 2 of the 80 possible seats there
located in eastern UP. BJP’s first prime minister, Atal Bihari in 2014. They were won by then party president Sonia
Vajpayee, fought elections from UP’s capital Lucknow. Modi Gandhi (Raebareli, erstwhile constituency of Indira Gandhi)
realised the significance of UP to his party when he chose to and the current party president and son, Rahul (Amethi,
fight two seats in the 2014 election - one in his home state former seat of Rajiv Gandhi).
Importance of UP for BJP Importance of UP for Congress
80 (Seats) (% seats from UP)) 45 25 (Seats) (% seats from UP)) 12

Seats won in UP (LHS) Seats won in UP (LHS)
UP as % of total seats won UP as % of total seats won
70 40
10
20
35
60
30 8
50
15
25
40 6
20
10
30
15 4
20
10
5
2
10 5
0 0 0 0
1989 1991 1996 1998 1999 2004 2009 2014 1989 1991 1996 1998 1999 2004 2009 2014
Source: CLSA, ECI Source: CLSA, ECI

Large BJP loss anticipated UP would see the biggest impact of a possible opposition alliance; to a lesser
in UP if opposition forms extent in MP and Karnataka. Based on data from 2014, BJP would lose 54 seats,
alliance all other things being equal:
 We assume that the vote share of all parties remains as it was in 2014,
 We aggregate the vote share for SP, BSP and Congress in all constituencies
and compare that to BJP’s share,
 For MP and Karnataka, we repeat the same exercise by aggregating the vote
share of BSP and Congress, and JD (S) and Congress.
Figure 52
Possible major losses for BJP (based on modern scenarios)

State 2014 Scenario Loss in Assumption
BJP tally BJP tally seats
Uttar Pradesh 73¹ 23 50 Assuming SP, BSP, and INC contest together as in
recent by-polls; 2017 state election data used
Madhya Pradesh 27 25 2 If Congress-BSP combine
Karnataka 17 15 2 If Congress-JDS combine
¹ BJP has 71 seats; two were an alliance partner. Source: Election Commission, CLSA
Figure 53
BJP could lose more than BJP seat share and vote share in UP (based on consolidated opposition)
50 seats in case of an
opposition alliance 2014 vote share in UP 2014 seat break-up in UP
Others SP BSP Congress
8% 5 0 2
Congress
7%
BJP+
43%
BSP
20%
SP BJP+
22% 73
BJP SP INC BSP
BJP could
lose 50 seats Combined-opposition scenario
Vote share in new scenario Seat break-up in new scenario

Others Others
8% 0
BJP+
BJP+ 23
43%
Combined Combined
opposition opposition
49% 57
Source: Election Commission, Government of India, BSP, Global Panorama, Prakash Pandey CLSA; Combined-
opposition scenario, based on 2014 general election numbers

Even if leaders agree to In spite of winning 43% of the UP vote share in 2014, BJP took 90% of seats
field a unified candidate, because opposition was fragmented. The three key parties - SP, BSP and
it’s hard to convince voters Congress - together had a 49% share of the ballot, a 6-ppt advantage over BJP. If
this coalition fights the election together next year and vote share remains the
same, it will likely end up winning 57 constituencies, reducing BJP to less than 25.
The assumption here, of course, is that all the parties are able to retain their
respective share in the alliance. In reality, however, there’s always some
possibility of leakage.
Outside UP, the impact of In the two other states of Madhya Pradesh and Karnataka, the expected impact of
opposition unity is likely to possible coalitions is limited to four seats in total, based on vote share in 2014.
be limited Due to BJP’s weaker presence in areas where JD (S) is strong, a recently formed
Congress-JD (S) alliance in Karnataka is unlikely to impact the former’s prospects
there; the bloc will only increase vote share in areas BJP was already losing.
In many other states there In other southern and eastern states, BJP doesn’t have a large presence and rivals
is a two-way fight do not need alliances to win, while in some - like Gujarat, Bihar, Uttarakhand - it is
a straight two-way fight between Congress and BJP as other parties are too small
make a difference.
Figure 54
JD (S) leader HD Kumaraswamy meeting Rahul and Sonia Gandhi
Source: Postcard.News
No single leader from the opposition parties

Stopping BJP is the While the parties speak in unison about stopping BJP from returning to power,
common goal there is no consensus over who would lead any alliance. Notably, Congress itself
has not been pushing for its leader Rahul Gandhi as a consensus candidate. Its
closer allies have stated that there are many potent leaders in their stable with
the capability to lead the nation. This move is clearly aimed to ensure other
political leaders, such as Mayawati, Mamata Banerjee and Sharad Pawar, who
have their own ambitions to become prime minister, do not feel threatened. But
this is also a major weakness of this likely alliance given it is up against Modi,
considered the strongest Indian leader for decades.

Figure 55
Key opponents’ views on the next likely prime minister
Rahul Gandhi, Well, that depends . . . that depends on how well

when asked the Congress does. I mean . . . the Congress,
about being PM if it's the biggest party . . . yes.
Akhilesh Yadav,
when asked
about prospects of You will see a new prime minister after the elections.
Rahul Gandhi
being next PM
HD Kumaraswamy Mayawati has emerged as a powerful politician.

of JD (S) when She is the only “dabang” (fearless) leader who can
asked about the stop the winning chariot of Narendra Modi and
next PM Amit Shah in the electoral battle.
Sharad Pawar has a good standing in national politics.

Praful Patel of Even prime minister Narendra Modi too consults him
NCP on next PM on several issues. His long-standing dream (of
becoming prime minister) too can get fulfilled in 2019.
The reality is that everyone is focused on electing

Derek O'Brien of a people-centric government and removing the BJP . . .
TMC on next PM so, one of the most senior leaders in this matrix is
Mamata Banerjee.
Source: CLSA, Media reports; US state department, BSP, Global Panorama, Prakash Pandey, Biswarup Ganguly
In addition to a lack of consensus over leadership, some recent opposition-

alliance progress is at risk from a bitter political fight resulting from JD (S) facing
Congress candidates in its core areas. The parties took a long time deciding on
sharing ministries and chief minister HD Kumaraswamy of JD (S) is already
expressing disappointment with the coalition.
Figure 56
Recent exchange between the leader of JD (S) and a senior Congress official
HD Kumaraswamy, after becoming chief minister of Karnataka in a coalition

‘Today I am at the mercy of the Congress. I am not under the pressure of 65m
people of the state.’
‘I am not happy. The pain that I have . . . I have swallowed that pain like
Vishakanta [an Indian God].’
Siddaramaiah, senior Congress official and former chief minister

In a letter to Kumaraswamy, he urged the CM to roll back the tax on fuel and also
reverse the decision to reduce by 2kgs the amount of rice distributed under PDS
to families below the poverty line.
Source: Media reports

India has seen many cross-party alliances with different ideologies over the years.
Cracks appear more often than not, mostly over power-sharing arrangements and
conflicting views designed to woo the parties’ own core voters.
Figure 57
Some cross-party alliances
Alliance
Parties allying State Comments
lasted for
JD (S) + Congress
Karnataka Some cracks
Currently in
formed in already
effect
June 2018 appearing
Third Front + Congress

Lasted for less
There was also a
Number of regional National level than two years,
change in PM
parties supported by in 1996 ending in March
midway in 1997
Congress 1998
RJD + JD (U) + INC

Bihar, formed
Two years. JD (U) allied with
before the Bihar
Alliance ended in BJP and formed
state elections
July 2017 the government
in Nov-2015
PDP-BJP
J&K, formed Three years.
Governor’s rule
government Alliance ended in
currently
in March 2015 June 2018
Source: CLSA, Government of India, Kiran Jonnalagadda Prakash Pandey, Smapk, RaviC, Shivam Setu
Coalition governments have been stable, barring two cases

Coalitions are nothing new Although the 2019 election raises the prospect of coalition, India is not new to
this phenomenon. The 2014 cabinet was an exception, as every administration
between 1991 and 2014 was an alliance. Looking at various periods from a policy
perspective, there were seven general elections and, barring two examples, all the
governments completed their full terms and can be considered stable.
The two that didn’t last the distance was the third-front government supported
by Congress during 1996-98. Within a year, then prime minister HD Devegowda
was replaced after Congress threatened to withdraw support. His successor, IK
Gujral, lasted for less than a year and eventually fresh elections took place.

The second case was Atal Behari Vajpayee of BJP, who formed a rainbow
coalition in 1998. BJP was the largest party, with 182 seats, well short of a
majority and hence dependent on allies for support. AIADMK (18 seats) withdrew
support after some of its demands was not met. NDA lost a no-confidence motion
by one vote and elections were held in 1999.
It is notable that several important reform measures were passed during

coalitions, most notably during the 1996-98 ‘weak coalition’ (third-front led,
Congress supported from outside), when then non-Congress finance minister P
Chidambaram presented what is known as the ‘dream budget’ of 1997. We do not
expect India’s continuing reform path to reverse course during a potential
coalition government.
1991-96: Congress-led coalition

Prime minister: The 1991 Congress government was a strong coalition with the party having 233
PV Narasimha Rao seats and initial support from left-wing parties. India’s weak BoP situation
between FY89-91 had led to foreign-currency assets declining by 47%, to
US$2.2bn, triggering Delhi to seek IMF funding. Subsequently, in 1991 the
cabinet began to liberalise substantial sectors, including the stock markets, and
open up to foreign investment. The economy did well but reforms drove the
leftist allies away, leaving the government to face no-confidence motions, which
in turn led to roping in of more allies later in its tenure. Nonetheless, reform
momentum continued and budgets saw major reform action up to 1996.
Figure 58
Finance minister: Coalition composition and key reforms (1991-96)

Dr Manmohan Singh
Coalition composition Key reform measures
 Currency regime liberalised with move to market-

Ruling coalition :
linked exchange rates
Congress: 232
 Foreign participation in equity markets allowed for the
AIADMK: 11
first time
JMM: 6
 FDI allowed up to 100% in 111 sectors
 Industrial activity delicensed
Note: CPI (M)/CPI (total: 49) did not
 Banks opened up for private competition
join the government but offered
 Rationalisation of taxes: peak customs duty cut from
support from outside initially.
150% to 50%; marginal income tax from 50% to 40%
RLD (earlier JD) and JMM were roped
 Infrastructure sectors like power, telecom opened up
in as allies later in the tenure
for private competition
Source: CLSA, economic surveys, Election Commission
Figure 59
Key economic and market indicators (1991-96 government)

Real GDP growth CPI (%) Fiscal deficit (% CAD (% GDP) Annual avg Rs Nifty returns (%) MSCI AxJ returns
(% YoY) GDP) depreciation (%) (Rs-based, %)
FY92 1.4 13.7 5.9 0.4 (27) 244 65
FY93 5.4 10.1 5.7 1.8 (15) (48) 28
FY94 5.7 8.3 7.4 0.4 (8) 78 46
FY95 6.4 10.9 6.0 1.1 0 (16) (1)
FY96 7.3 7.8 5.4 1.8 (6) (0) 25
Source: CLSA, Bloomberg, CMIE, Ministry of finance, RBI

1996-98: National-front coalition

Prime Minister: Even as BJP emerged as the single largest party in 1996, a national front (non-
HD Devegowda (1996-97) Congress and non-BJP parties) government was formed, with Congress leading
outside support. Finance minister was Palaniappan Chidambaram, who then was
part of Tamil Manila Congress (TMC), a break-away Congress faction. Under
Chidambaram, the path of the previous years continued, with several reforms
undertaken to strengthen the capital markets, while the government cut taxes
(both direct and indirect) significantly. It lost power when Congress withdrew
support in 1998.
I.K. Gujral (1997-98) Figure 60
Coalition composition and key reform measures (1996-98)
 Peak income tax rate cut from 40% to 30%

Ruling coalition:
 Tax on dividends abolished
Janata Dal: 46
 Capital market reforms include dematerialisation of
SP: 17
Finance minister: shares, electronic trading, foreign investments in debt
TDP: 16
P. Chidambaram Left front: 52 (CPIM - 32, CPI -12,
 Peak corporate tax rate cut from 46% to 35%
 Tax holidays for developing infrastructure projects
RSP - 5, AIFB - 3)
announced to boost private participation
Tamil Manila Congress : 20
 Automatic FDI approval up to 74% allowed in sectors
DMK: 17
like electricity and ports
AGP: 5 & Others: 19
 A scheme to regularise undeclared income was
Note: Congress (140 seats) did not join
launched at attractive tax rates
gov’t but offered support from outside
 Excise duty brackets reduced to broadly three rates
Figure 61
Key economic and market indicators (1996-98 government)

FY97 8.0 6.3 5.1 1.3 (6) (2) 1
FY98 4.1 6.8 6.1 1.4 (4) 15 (28)
FY99* 6.2 13.1 6.8 1.0 (12) (3) (5)
Source: CLSA, Bloomberg, CMIE, Ministry of finance, RBI. *See below for 1998-99 BJP-led coalition
1998-99: BJP-led coalition (NDA - 13-month government)

Prime minister: BJP emerged as the single largest party in 1998 and formed the government.
AB Vajpayee Prime minister AB Vajpayee immediately continued the delicensing regime,
opening up FDI and expanding capital-market reforms. The repeal of the Urban
Land Ceiling Act, paving the way for more pragmatic and privately led urban
development, was a major decision. Disinvestment processes began for several
large PSUs, like Gail and IOCL.
Figure 62

Finance minister:
Yashwant Sinha
 Private participation allowed in coal, petroleum and

Ruling coalition :
power transmission sector
BJP: 182
 The Urban Land Ceiling Act was repealed, marking a
JDU: 12, TDP: 11, BJD: 9
major easing in urban property development rules
SAD: 8, Trinamul: 7, DMK: - 6
 FDI allowed up to 100% in power, roads and ports
Shiv Sena: 6, Others: 30
 Part/full sale of PSUs like Gail, IOCL and VSNL started

1999-2004: BJP-led coalition (NDA-1)

Prime Minister: The Vajpayee government’s dramatic one-vote defeat in a no-confidence motion
AB Vajpayee and subsequent election led to the formation of a stable government in 1999. The
first non-Congress government to complete a five-year tenure, Vajpayee ushered
in several lasting reforms, including the elimination of long-term capital gains tax
on equities, and a major disinvestment push, including selling off of several
public-sector companies. He ushered in a major road development programme,
opened up the telephone sector for private players, and brought in landmark
provisions for the banking sector to tackle non-performing assets (NPA).
Finance minister:
Yashwant Sinha
(1999-2002) Figure 63
Ruling coalition :
Finance minister: BJP: 183  Taxation on long-term capital gains removed
Jaswant Singh (2002-04) JDU: 21  Electricity Act was brought to start private competition
DMK: 12, Trinamul: 8 in all segments, including distribution
Shiv Sena: 15, BJD: 10, SAD: - 2  Massive road/highway upgrading programme started
Others: 20  Privatisation of PSUs sees push with several companies
like hotels, telecom sold off
Note : TDP (29 seats) did not join the  1999 telecom policy opens industry to private sector
gov’t but had its MP appointed as the  Bank Securitisation Act passed to deal with bad loans
speaker of the house
Figure 64
Key economic and market indicators (1999-2004 NDA-1 government)

FY00 8.5 3.4 5.7 1.1 (3) 42 54
FY01 4.0 3.8 6.0 0.6 (5) (25) (35)
FY02 4.9 4.3 6.5 (0.8) (4) (2) 15
FY03 3.9 4.0 6.2 (1.3) (1) (13) (28)
FY04 7.9 3.9 4.7 (2.4) 5 81 53

2004-09: Congress-led coalition (UPA-1)

Prime minister: The elections of 2004 saw Congress emerge as the single largest party, with 145
Dr Manmohan Singh seats. Supported by left-wing allies and a broad coalition that Congress was able
to stitch earlier, a United Progressive Alliance (UPA; a centre-left coalition)
government came to power. UPA started with a common minimum programme
that the partners agreed upon. While UPA-1 did not undertake any drastic
reforms, it built upon previous ones - policy efforts included a big push towards
public-private partnership (PPP) to create infrastructure assets, starting a special
economic zone (SEZ) policy, implementing VAT country-wide and passing a
nuclear bill that substantially improved India-US relationships.

Figure 65
Finance minister: Coalition composition and key reform measures (2004-09)

P. Chidambaram
Ruling coalition :
 Fiscal Responsibility Act, passed by previous gov’t, is
Congress: 145
implemented to limit gov’t deficit
RJD: 21
 A value-added tax (VAT) system implemented
DMK: 16
 India-USA civil nuclear cooperation agreement signed
NC : 9
and corresponding nuclear bill passed by government
PMK: 6, JMM: 5, MDM : 4
 Peak non-agri customs duty decline to 10%
LJP: 4, TRS: 2, Others: 3
 Special Economic Zone (SEZ) Act passed to give
substantial tax breaks for promoting exports
Note: Left parties (total: 59) did not
 Large infrastructure projects viz dedicated freight
join gov’t but offered support from
corridor, ultra mega power projects started
outside till 2008
Figure 66
Key economic and market indicators (2004-09 UPA-1 government)

Real GDP Growth CPI Inflation (%) Fiscal deficit (% CAD (% GDP) Annual avg Rs Nifty returns (%) MSCI AxJ returns
FY05 7.9 3.8 4.2 0.4 2 15 8
FY06 9.3 4.4 4.3 1.3 2 67 31
FY07 9.3 6.7 3.6 1.1 (2) 12 17
FY08 9.8 6.2 2.8 1.4 12 24 7
FY09 3.9 9.1 6.4 2.4 (12) (36) (31)
Source: CLSA, Bloomberg, CMIE, Ministry of Finance, RBI
2009-2014: Congress led coalition (UPA-2)

Prime minister: The 2009 election saw Congress return with a better mandate than in 2004,
Dr Manmohan Singh winning 206 seats. The coalition, as such, started life as more stable than the
previous one. However, it weakened over time as allies withdrew support, partly
due to Congress’s dipping popularity. Although ‘policy paralysis’ was deemed to
affect the latter part of UPA-2, several important reforms were actually initiated
and built upon by Modi’s administration. Primary amongst these are the UID/DBT
project and the mechanism of gradual fuel-price hikes to put an eventual end to
subsidies.
Finance minister:
Pranab Mukherjee Figure 67
Ruling coalition :
 The Unique Identification program launched
Congress: 206
 Direct Benefit Transfer method started to improve
Finance minister: AITC: 19
subsidy targeting
P. Chidambaram DMK: 18
 Move to gradual reduction in diesel fuel subsidy by
NCP: 9
taking Rs0.25/month price hikes instead of ad-hoc
NC: 3, JMM: 2, IUML: 2
 Auctioning started for telecom spectrum sales
Others: 3
 Disinvestment of public-sector units restarts, with new
IPOs like Coal India
Note: SP (23), BSP (21), RJD (4), JDS
 FDI limit hikes in several sectors including Telecom
(3), Others (3) offered unconditional
(100%) and single-brand retailing (100%)
outside support post polls

Figure 68
Key economic and market indicators (2009-14 UPA-2 government)

(% YoY) GDP) depreciation (Rs-based, %)
(%)
FY10 8.5 12.4 6.6 2.9 (3) 74 50
FY11 10.3 10.5 4.6 2.9 4 11 16
FY12 5.5 8.4 5.9 4.3 (5) (9) 4
FY13 5.5 10.1 4.9 4.8 (12) 7 12
FY14 6.4 9.4 4.5 1.7 (10) 18 10

Manifesto analysis India strategy
Manifesto analysis
Rural/agri Sops and subsidies Power/infra Employment Housing Economy/taxation Others General-election performance (seats)
BJP  Strengthen and  Put in place welfare  Launch Diamond  Develop high-impact  Roll out massive low-  Strictly implement  Take all necessary 300 (BJP seats) 282
expand rural credit measures for small Quadrilateral high- domains like labour- cost housing fiscal discipline steps to reduce NPAs 250
facilities and marginal farmers, speed train project intensive programme to ensure in banking sector
 Single-window 200 182
and those above 60 manufacturing everyone has one by
 Implement farm  Build 100 new cities clearance system  Explore all 150
138
years of age 2022 116
insurance scheme  Encourage youth for constitutional
 Wifi facilities available  All states on board for 100
 Strengthen pension self-employment  Encourage sector via possibilities to build
 Reform APMC Act in public places GST adoption 50
and health insurance proper policy Ram Mandir
 Skill mapping of
 Generate IT-based safety nets for all intervention, credit  FDI in sectors that 0
human resources  Create open 1999 2004 2009 2014
jobs in rural and semi- labourers availability and can create jobs - ex
defecation-free India
urban areas interest-subvention multibrand retail
by 2-Oct 2019
schemes
Congress  Increase coverage of  Food security scheme  National policy of

crop insurance to include pulses and manufacturing to
 Provide skills training
to 100m youth and
 Expand Indira Awas
Yojana to cover all
 Present clear
roadmap for dealing
 Completely
modernise/ digitise
250 (Congress seats)
206
200
cooking oil enhance share of GDP provide employment poor rural homes with immediate land records to
 Provide concessional 145
to 25% by 2022 opportunities in next public-sector-bank ensure transparency 150
loans of Rs0.5m to  Target subsidies only  Expand Rajiv Awas 114
five years issues, inc
small and marginal to the needy  Invest US$1tn over Yojana to cover all  Ensure 10% growth 100
recapitalisation, NPAs
farmers next decade to  Set up national skills poor urban homes in rate in manufacturing 44
 Universal pension 50
upgrade infrastructure development agency 250 cities by end of  Achieve 3% fiscal sector
 100% drinking-water scheme for elderly,
2017 deficit by FY17 0
coverage in rural areas destitute, widows, etc  Ensure high-speed rail  Create 6m new jobs in 1999 2004 2009 2014
coverage of all million health sector by 2020  Introduce GST

 Increase rural areas’  Ensure every citizen
-plus cities legislation
access to cooking gas has a bank account
within next five years  Increase investment  Remove
rate to 38% unpredictable risk of
retrospective taxation
AIADMK  Rs400bn loans to

farmers over 2016-21
 Women’s mopeds/
scooters get 50%
 100 free units of
electricity per month
 Education loans of
students who are still
 1m houses promised  Poor people’s Amma  Phased-in prohibition
through various bank card to avail enforced in Tamil
40
35
(AIADMK seats) 37
subsidy unemployed to be housing schemes gov’t services Nadu 30

 Waive all farm loans  Free wifi at public
paid by the govt. 25
from co-op banks  Free cell phones for spaces  Raise housing loans  Revise state- 20
all ration-card holders  Set up Rs5bn Amma for gov’t employees government 15
13 12
VC fund to back to Rs4m employee salaries as 10

 One gold sovereign
MSME innovation per seventh pay 5 0
for women ahead of
commission 0
marriage 1999 2004 2009 2014
 Maternity assistance
of Rs18,000
DMK  Increase paddy’s

minimum support
 20kg of free rice per
month
 Establish leather park  Rs0.1m funding for
in Chennai, Dindigul entrepreneurs
 Rs0.3m subsidy to
construct concrete
 Law to implement
prohibition
45
40
(DMK seats)
39
35
price and Vellore houses for low-
 Subsidised cell phones  Employment camps in  Increase maternity 30 26 27
income groups
 Single window all districts leave to nine months 25
 Write-off student 20
clearance in 100 days
loans  100,000 new jobs 15
for establishing 10
created every year
industries 5 0
0
1999 2004 2009 2014
Continued on the next page

Manifesto analysis India strategy
Manifesto analysis (continued)

Rural/agri Sops and subsidies Power/infra Employment Housing Economy/taxation Others General-election performance (seats)
TMC  Work to double

farmer income in next
 Health card for every  Complete metro rail
individual in West projects in Kolkata
 Retain contractual
workers till aged 60;
 Focus on Housing for  Stop hartal culture in  Set up 41 multi-
All programme West Bengal, which specialty hospitals
40
35
(TMC seats)
34
five years Bengal state and associated areas 3% pa salary increase has hampered 30
 Give housing loans at  Introduce wifi across
economic growth 25
 Ensure insurance for  Bikes for all Class 11-  Complete Kolkata-  Placement-linked skill- minimal rates colleges/universities 20
19
all food crops and 12 minority students Amritsar industrial development tie-up  Further strengthen 15
 Build over 0.5m flats
producers corridor, set up with electronics, MSME VC funding 10
8
 Distribute shoes to for gov’t employees

clusters along it clothing, paint process 5 2
Class 5-8 students
companies, etc 0
 Set up special 1999 2004 2009 2014
industrial parks for

jewellery-making,
foundry and packaged
and processed foods
BJD  Reduced agri loan

interest rates to 1%
 Universal pension
coverage
 Convert two-lane
roads to four
 Focus on value
addition and
 Provide phased
assistance to convert
 Make sincere effort  Provide girl students
to revive sick/closed with 6% interest
25 (BJD seats)
20
20
downstream all kutcha houses to industries subsidy on education
 Additional irrigation  Universal public  All villages will have 14
industries to promote pucca loans; boys with 4% 15
facility for 1m ha land distribution system universal access to 11
employment 10
electricity and piped 10
 Free bikes for Class opportunities
water supply
10 students 5
 Create Odisha youth
 Free health insurance innovation fund to 0
1999 2004 2009 2014
and Rs1 per kg rice to assist young
all slum-dwellers entrepreneurs
 Increase recruitment
in gov’t departments
TRS  Farm-loan waivers of  Disabled pension of

Rs0.1m Rs1,500 a month;
 Set up 10 thermal
power stations
 Set up thermal power
plants to create 0.1m
 Two-bed houses for
weaker sections of
 Increase no. of
districts from 10 to
12
10
(TRS seats) 11
Rs1,000 for widows jobs society 24

 Eight hours of free  Set up 24 super 8
electricity daily for specialty hospitals 6 5
farmers using 4
pumpsets 2
2
0
1999 2004 2009 2014
SP  Low-interest credit
for farmers
 24/7 power supply for  Accelerate pace of
homes in rural areas road connectivity to
 Introduce
entrepreneurship
 Develop greenfield
townships
 Practical
implementation of
 State gov’t to make
universities/colleges
40
35
(SP seats) 36
Eastern UP development ‘ease of business’ wifi enabled 30 26

 Subsidise interest on  Cover 10m families 23
programmes and 25
farmer credit cards under Samajwadi  Metro connectivity in  Start single-window 20
start-up schemes for
pension yojana; give Noida, Ghaziabad, clearance system for 15
 Implement new the youth
each family Rs1000 Kanpur, Meerut, Agra entrepreneurs/busine 10 7
practical plan of crop
every month and Varanasi  The gov’t will provide ssmen 5
insurance for farmers
training and generate 0
 Implement subsidised  Connect surrounding 1999 2004 2009 2014
 Kisan credit card jobs for
midday meals for areas of Lucknow,
(KCC) holders entitled sportsmen/women
workers in entire state Kanpur, Allahabad and
to interest subsidies
Varanasi via cycle
highways
Source: CLSA

Section 3: X factors India strategy
X factors
A host of factors, aside from those discussed earlier, can have a substantial
impact on the 2019 general election. These include voter turnout, caste dynamics,
momentum in the run up to the election, vote-share concentration and other
emotion-based factors. We also highlight the perils of reading too much into
state-election results, which are often fought on more local issues, and the
outcome of by-polls, which often do not generate as much interest amongst
voters. We also dwell on the demographics and new entrants in India’s electorate
process. The growing dominance among the electorate of millennials, with whom
economy-related issues resonate more, could also shape the electoral narrative,
while the influence of social media will also be closely monitored.
Figure 69
Nine X factors X factors
Factor Description
Growing importance Number of data users have doubled since last elections; expected to have
of social media significant impact on elections
National election vs National parties get 2-4ppts more vote share in national elections vs state
state election voting elections, so state results cannot be extrapolated straightaway
By-poll results By-poll elections are low-involvement elections with lower rate of
participation
Popularity Concentrated vote share in certain areas leads to higher seat share
concentration
Voter turnout Higher voter turnout usually leads to decisive mandate
Caste- and religion- Caste and religion still play a big role in several states’ voting
based politics
Young voters More than 100m new voters expected to be eligible in 2019 vs 2014
Emotional factors Cause large swings in elections. Disputed Ayodhya temple/mosque could be
one such issue this time
Momentum Results from key state elections of Rajasthan, MP, and Chhattisgarh in
December 2018 can alter voter mood and tone
Source: CLSA
Growing importance of social media

Around 500m internet According to Telecom Regulatory Authority of India data, there were 494m internet users
users, 270m Facebook users as of March 2018, nearly 40% of the total population - almost double the number of
and 225m WhatsApp users people with internet access at the time of the last general election. More importantly,
internet quality has improved significantly, with nearly 400m of these users now with
3G/4G data access, compared to only 46m in March 2014, which can be used for more
data-intensive purposes, such as video streaming. Most use several networks. Facebook
has nearly 270m users in India, as per Statista, the highest number of any country in the
world; similarly, it is estimated that there are around 225m WhatsApp users.

Figure 70
Large numbers of Indians Internet and social-media users’ data in India

use social media
270m
500 (m)
2G subscribers 78
400 3G/4G subscribers
300
200
10m
394
187
100
46
0
Mar 14 Mar 18
252m 494m
users users
225m
Source: TRAI, Statista, CLSA
The sudden increase of social-media use in India is likely to have a significant impact on
next year’s election and already there has been considerable discussion about this. On the
positive side, these platforms are expected to empower the average voter, providing
better and faster information. So far, however, the talk has largely been negative after a
spate of mob lynchings were attributed to WhatsApp messages going viral.
Figure 71
Negative impact of Pros and cons of accelerated growth in social media presence of Indians
increased social media in
India dominates attention
Fake news/
More info to voters
disinformation
Better engagement Personal data breach
Voice to marginal voters Online abuse
Source: CLSA
Misuse of social media in The ongoing debate on the alleged manipulation of voting behaviour in US elections has
elections has been a big only added fuel to the fire. In this context, the misuse of user data by analytics firms to
talking point favour a certain party has already created ripples in India. Cambridge Analytica, accused
of using Facebook data belonging to over 50m users to influence US elections, is also
alleged to have worked with Indian political parties. A company whistle-blower
testified in the UK parliament that they worked extensively in India and named
Congress as a client, leading to a slugfest with BJP. Ravi Shankar Prasad, the law
minister, subsequently warned social-media sites about misusing user data and

platforms to influence Indian elections; Facebook has said it is working to verify

pages and advertisers on their site before the election. Interestingly, in the run up
to Pakistan’s election, it disabled accounts related to certain extremist parties.
Figure 72
Events related to Cambridge Analytica in India
Cambridge Analytica  Whistleblower claimed the firm had worked for Congress in India
 Law minister warns social-media sites against any attempt to

BJP influence elections in India
 Accuses Congress of trying to win elections by unfair means
Congress  Congress denies working with Cambridge Analytica
 Plans to make misuse of social media in polls a civil offence

Election Commission
 No election-related (re)tweets allowed 48 hrs before elections
 Apologised for data breach related to Cambridge Analytica

Facebook
 Working to verify pages/advertisers on website before Indian elections
Source: CLSA
Nonetheless, given social-media platforms’ vast potential and the access they provide to
voters, every party is trying to woo voters this way. Each has its own social-media cell
making strategy for different platforms; websites contain all the details related to
manifestos, the latest speeches, online membership and how to donate.
Figure 73 Figure 74
Main page interface of Congress website Main page interface of BJP website
Source: Indian National Congress Source: BJP

At the same time, the majority of political leaders interact with supporters via Twitter and
Facebook, etc. Modi has 43m followers on Twitter and was very active on the platform
before assuming office in 2014. After Donald Trump, he has the most followers of any
political leader globally. With 7m followers, Rahul Gandhi has somewhat fewer, having
opened an account in 2015.
Figure 75
Modi is far more popular Indian political leaders’ Twitter followers

than any other political
leader in India
Donald Trump 53.2
Narendra Modi 43.2
Amit Shah 11.3
Akhilesh Yadav 8.4
Rahul Gandhi 7.2
Nitish Kumar 4.4
Chandrababu Naidu 4.0
Mamata Banerjee 2.8

(m)
0 10 20 30 40 50 60
Source: Twitter
Congress & BJP get more votes in national elections

Regional parties have more Local affairs tend to dominate India’s state elections, while general elections are
at stake in regional contested over national issues. This is assumed given that a local party is less
elections likely to have a major say at a national level. As a result, some fence sitters vote
for a national party in general elections but a local party in state elections. This
hypothesis is corroborated by our voting-pattern analysis of different types of
elections in key states over the last 10 years. In states where regional factions are
generally stronger, the voting percentage of national parties like BJP and
Congress is higher in national elections, compared to state elections.
We analysed data for seven The data for the seven large states, which account for around 50% of all Lok
large states Sabha seats, indicates that BJP vote share increased by over 4% on average in
these states in the 2009 and 2014 general elections than in the corresponding
state elections. Similarly, Congress’s rose by 2.2%. On the other hand, regional
parties like DMK, AIADMK, JD (S), TMC and SP received lower vote share in
general elections.
This also indicates national parties generally are likely to do better in general
elections versus state elections, particularly in regions where the vote-share
differential between national and regional parties is lower.

Figure 76
BJP and Congress clearly do Difference in parties’ vote share (state vs general elections)
better than regional parties (%)
6
in general elections
4.2
4
2.2
2
(0.9)
(2)
(2.7)
(4)
(6) (5.7)
(6.4)
(8) (7.3)
JD(S) TMC AIADMK SP BSP Congress BJP
Source: Election Commission, based on data of seven states: UP, MP, Maharashtra, Tamil Nadu, Bihar, Karnataka
and West Bengal
Bye-poll results cannot be extrapolated

Recent losses for BJP in bye The key reason for opposition parties’ renewed optimism that they can prevent
polls have revived Modi returning to power next year emanates largely from their successes in some
opposition’s hopes recent by-polls, particularly in UP, where combined opposition candidates
trumped BJP’s. Based on the evidence of recent data, the correlation between
wins in by-polls and actual national polls is tenuous. Extrapolating results,
therefore, is not necessarily correct. We also believe that the following factors
limit the utility of extending by-poll trends as general-election indicators.
By-polls generate lower Lower voter turnout: In by-polls, voter turnout is usually lower than actual polls,
voter interest primarily due to the winner only getting the remainder of the term in parliament
as opposed to a full five-years, and also because lack these elections are often
held in isolation and lack any national- or state-level narrative. Three UP by-poll
seats, which have recently gained attention, have had much lesser turnout in by-
polls than in 2014.
Figure 77
2014 general election vs 2018 voter turnout

Seat 2014 General 2018 by- Difference 2014 2018
elections (%) polls (%) (ppts) winner winner
Gorakhpur 54.6 47.5 (7.1) BJP SP
Phulpur 50.2 37.4 (12.8) BJP SP
Kairana 73.1 54.0 (19.1) BJP RLD, opposition consensus candidate
Big leaders don’t campaign Less political interest: It has been a long tradition in India that prime ministers do
not campaign in by-polls and many other leading leaders do not participate in
them. This reduces the pull factor for core supporters. At the same time, some
parties, such as BSP (over 20% of the vote in UP), have a policy of not
participating in by-polls.
Remaining time is less than Limited utility: By-polls do not have any utility, from a stability standpoint, in
five years so a win holds cases where governments already have a comfortable majority. This is certainly
less utility the case in some of the by-polls in UP, as Modi has a comfortable majority.

UP by-polls have not The limitation of by-poll results as a barometer of popular public sentiment is
correctly predicted seen in UP assembly by-poll results between Modi coming to power and the next
assembly-poll outcomes state elections, held in March 2017. Of the 18 out of 403 assembly seats in the
state that had by-polls, Samajwadi Party (SP) won 12, BJP managed five and
Congress one. But in last year’s state elections, four of these 18 seats went to
SP/Congress and Modi’s party won 14, showing it was clearly able to turn the
tables decisively in elections proper.
Figure 78
Results of by-polls (Uttar Pradesh)

Seat Year Winner 2017 state-election winner
Saharanpur 2014 BJP INC+SP
Bijnor 2014 SP BJP
Thakurdwara 2014 SP INC+SP
Noida 2014 BJP BJP
Nighasan 2014 SP BJP
Lucknow East 2014 BJP BJP
Charkhari 2014 SP BJP
Hamirpur 2014 SP BJP
Sirathu 2014 SP BJP
Balha 2014 SP BJP
Rohaniya 2014 SP BJP
Pharenda 2015 SP BJP
Bilari 2016 SP INC+SP
Jangipur 2016 SP INC+SP
Bikapur 2016 SP BJP
Deoband 2016 INC BJP
Muzaffar Nagar 2016 BJP BJP
Sikandra 2017 BJP BJP
BJP wins 5 14
SP/Congress wins 13 4
Total 18 18
Concentration of popularity matters

Vote share vs seat share India’s “first past the post” parliamentary system means the candidate with
highest vote share wins the elections in a constituency. In several seats where
there are multiple strong candidates the winner can have well below 50% of the
vote. Similarly, a spread-out share in several constituencies is of no significance
without winning a majority vote. This also implies that concentrated vote share in
a small number of constituencies is more important to win seats than small vote
shares in a large number of constituencies.
BJP had a 31% share of the vote across India in 2014 and won 52% of the seats,
while Congress, with 20% of the vote, won only 8%. This implies that for every
1% vote share, BJP took 1.7% of the seats and Congress 0.4% - a result of its
stellar performance in a few states, despite Congress’s wider geographical spread.
India’s third most popular Despite the third-highest vote share of all the parties (4.1%), BSP did not win a
party could not win a single single seat as its vote share was too spread out. AIADMK and TMC - with vote
seat in 2014 shares of 3.3% and 3.8% - won 6.8% and 6.3% of the seats, a result of
concentrated vote shares in their respective states of Tamil Nadu and West
Bengal.

Figure 79
Smaller regional parties won Seat-share-to-vote-share ratio for parties in 2014 (with >1% vote)
a disproportionate number Party Seats won Total seats in National vote Seat share to
of seats parliament (%) share vote share
BJP 282 51.9 31.3 1.7
Congress 44 8.1 19.5 0.4
Bahujan Samaj Party 0 0.0 4.1 0.0
Trinamool Congress 34 6.3 3.8 1.6
Samajwadi Party 5 0.9 3.4 0.3
AIADMK 37 6.8 3.3 2.1
Communist Party of India (M) 9 1.7 3.3 0.5
Telugu Desam Party 16 2.9 2.6 1.2
YSR Congress 9 1.7 2.5 0.7
Aam Aadmi Party 4 0.7 2.1 0.4
Shiv Sena 18 3.3 1.9 1.8
Biju Janata Dal 20 3.7 1.7 2.2
Nationalist Congress Party 6 1.1 1.6 0.7
Lok Janshakti Party 6 1.1 1.6 0.7
Rashtriya Janata Dal 4 0.7 1.3 0.5
Telangana Rashtra Samithi 11 2.0 1.2 1.7
Janata Dal (U) 2 0.4 1.1 0.3
In the 2004 and 2009 general elections, BJP and Congress had much closer seat-
share-to-vote-share ratios but the gap was significant in 2014.
Figure 80
Key reason for BJP success Seat-share-to-vote-share ratio (Congress and BJP)
in 2014 was its ability to (Seats to votes)
1.8 Congress BJP
concentrate vote share 1.7
1.6
1.4 1.3
1.1 1.1
1.2
1.0
1.0
0.8
0.6
0.4
0.4
0.2
0.0
2004 2009 2014
Voter turnout
Higher voter turnouts Higher voter turnout leads to more decisive mandates as it is seen as an
usually imply a “wave” indication of a “wave” for or against a party. In 2004, BJP was expected to win
election and retain power, and was so confident it called an early election, showcasing its
work in the ‘India Shining’ campaign. It lost, one of the reasons being not enough
core supporters turning up to vote. There was a 2% decline in voter turnout in
that election compared to the previous one, in 1999.

Turnout in 2014 was 66.4%, the highest ever and the result of massive anti-
incumbency sentiment against the UPA-2 government, which was mired in
various corruption scandals. There may have been some impact from voter-
awareness programmes undertaken by the Election Commission at various times,
but an 8ppt increase clearly reflected the electorate’s decisive mood for change.
Other instances of a large increase in voter turnout include 1984-85, when then
prime minister Indira Gandhi was assassinated and a strong pro-Congress
sympathy wave resulted in it winning over 400 seats in the general election,
highest ever for a party in any general elections in India; another in 1977
occurred when a Congress-imposed state of emergency was removed and there
was a strong anti-incumbent wave.
Figure 81
Big jumps in voter turnouts Trend in general elections’ voter turnout

have given decisive (%) Congress wave after
75 Anger against
mandates Anti-Congress assassination Congress
70 wave over of Indira Gandhi
65 emergency
66.4
64
60 61 62 62
60 60
55 57
58 58 58
55 55 56
50
45 48
46
40
35
30
1951
1957
1962
1967
1971
1977
1980
1989
1996
1998
1999
2004
2009
2014
1984-85
1991-92
Women came and voted The turnout of women voters in India has always been lower than overall voter
decisively in 2014 turnout in India, a result of a deeply patriarchal society. The differential between
total and female voter turnout was 9ppts in the early years of independence. This
number has been reducing and in 2014, it was 1ppt, the lowest ever. Female
turnout of 65.5% was almost equal to overall turnout. More women voting may
not favour a particular party but does incentivise governments to work more
proactively on women-related issues and policies, something that Modi has done.
Figure 82 Figure 83
Trend in general elections’ female voter turnout Differential between total and female turnout in general elections
70 (%) 10 (%)
65 9
9
65.5 8 9
60
7
59
55 57 58 6
56 55 56 56
6
50 53 54 5 6 6 6
51 51 5
45 49 4 5 5 5 4 4
47 4
3
40
2 2
39
35 1 1
30 0
1957
1962
1967
1971
1977
1980
1989
1996
1998
1999
2004
2009
2014
1957
1962
1967
1971
1977
1980
1989
1996
1998
1999
2004
2009
2014
1984-85
1991-92
1984-85
1991-92
Source: Election Commission Source: Election Commission

Tapping the “female vote”

Much of the political discourse within India’s first-past-the- the Mudra (easy loan) scheme are to women. Modi himself
post system focuses on catering to special interest groups, has promoted the ‘Save the Daughters, Teach the Daughters’
with caste, language and religion being obvious targets. campaign, designed to increase couples’ preference for baby
However, in order to break through these barriers, politicians girls. Recent attempts by BJP to pass the “Triple Talaq” Bill
would like to address what they think are certain broad specifically targets women by seeking to end the practice of
categories, those that are demographically grouped (youth, granting Muslim couples a divorce on the basis of the
senior-citizens) and/or gender based. Given that Election husband simply uttering the word ‘talaq’ (Urdu for divorce)
Commission data gives no real hints on gender-based voting three times in a row.
patterns, the “female vote” remains a slightly abstract
concept. Nonetheless, Modi has demonstrated a good ability Number of household toilets constructed as part of ‘Clean India’
to form and execute policies that essentially benefit women 90 (m)
more.
80
One women-focussed policy is the government’s massive

70
toilet-building programme. A lack of toilets in households,
particularly in rural areas, was a major sanitation - as well as 60
security - issue for women. Modi announced the scheme in
50
his first Independence Day speech, in 2014. As of this year,
80m household toilets have been constructed out of a target 40
of 110m, under the broader ‘Clean India’ initiative, with
sanitation coverage during the period up from 39% of 30
households to 81%.
20
Multiple other policies have been adopted that either directly 10

or majorly benefit women. The ‘Ujjwala’ scheme (see Section
1) has provided cooking-gas connections to households 0
Jul 15
Jul 16
Jul 17
Jul 18
Jan 15
Jan 16
Jan 17
Jan 18
Apr 15
Apr 16
Apr 17
Apr 18
Oct 14
Oct 15
Oct 16
Oct 17
previously dependent on other polluting/poorer forms of
kitchen fuel. Housing for All makes it mandatory to have a
woman as the main/co-beneficiary - 74% of all loans under Source: CLSA, Ministry of drinking water and sanitation
Some of the Modi government’s women-targeting measures
Measure Benefit for women
Doubling of household sanitation coverage to +80% in

Clean India four years important for women’s health & safety
Improved cooking fuel - move to gas from polluting &

Ujjwala less efficient wood or kerosene
Either the main or co-beneficiary under the scheme has

Housing for All to be a woman
Triple Talaq Bill Ending Muslim practice of divorce by decree
Source: CLSA

Caste- and religion-based politics

Caste/religion continues to India is riddled with castes and religions and, not surprisingly for a developing
impact political outcomes country, they matter a great deal in state and national elections. Elections have
been fought in the past on caste-based politics by dividing the electorate into
religions and castes. According to traditional Hindu concepts, Brahmins are upper
caste and Dalits are lower. There are several other castes/subcastes in between
and these change from state to state. Several regional parties - such as SP, BSP in
Uttar Pradesh, RJD, JD (U) and LJP in Bihar and JD (S) in Karnataka - are linked
with one caste or caste group. Over the years, all parties have carefully
considered caste and religion when deciding candidates - what in Indian polity is
referred to as “social engineering” - to win elections.
Figure 84
UP caste politics: Diverse and complex
Uttar Pradesh
caste equation
Upper
Dalit Muslim Backward
(21%) (19%) (41%) caste
(19%)
Other
Jatav Other Yadav Thakur Brahmin
(10-12%) (9-11%) (9-10%) OBC (7-9%) (10-12%)
(30-32%)
SP,
BSP/ SP/ BJP, BJP,
BSP SP Congress,
Congress Congress RLD Congress
BSP, BJP
Source: CLSA
With growing urbanisation and an increasing share of youngsters in the electorate

mix, caste dynamics are becoming less important. In 2014, BJP was able to win
votes across caste lines with its pro-developmental agenda, leading to a near
decimation of caste-based parties in UP and Bihar.
No formal data available on While the Election Commission does not capture any caste- or religion-based
which caste votes for which voting patterns, several surveys point out that BJP won votes across several
party/candidates
castes. However, given its high-pitch Hindu nationalism agenda and several
controversial statements made by leaders against the community, the Islamic vote
has more or less eluded it. Comprising around 15% of India’s population, this
voter bloc is likely to vote for non-BJP alliances next year, but the party is
working hard to attract Muslim women with legislation banning certain customs
considered regressive and discriminatory.

Figure 85
Poster carrying Modi’s ‘I am Hindu nationalist poster prior to 2014 election

Hindu Nationalist’ comment
during a Mumbai visit
Source: CLSA
Which way will young voters go?

Estimated 100m new Out of 834m eligible voters in 2014, 554m actually cast their ballot. The Election
registered voters for 2019 Commission recorded a total of 853m registered voters in early 2017, which is
likely to increase further as more people reach the voting age (18) and it
intensifies its registration process as the election approaches. As per World Bank
population data, more than 100m new voters will be eligible to vote in 2019,
compared to 2014, due to their age.
Figure 86
Last election saw 136m net Trend in net voter additions

new voters (m) (%)
160 Net voter additions over previous election (LHS) 30
Net additions as % of previous election voter base
140
25
120
20
100
80 15
60
10
40
5
20
0 0
1957
1962
1967
1971
1977
1980
1989
1996
1998
1999
2004
2009
2014
1984-85
1991-92
The Election Commission shows that 64m voters, or 8% of those who were aged
15-19 in 2014, are now registered to vote. Most of these would be first-timers
and more will be added before the election actually takes place. The 20-34-year-

old group, comprising millennials, is 39% of the electorate, leading us to believe

that more than 50% of all voters will be under the age of 40 in 2019, suggesting
issues surrounding jobs and economic prosperity will resonate more.
Proportion of older voters - The proportion of people who were born before 1947 is now less than 5%. This
strong support base of group typically has a stronger association with Congress given it was instrumental
Congress - is shrinking in India winning independence.
Figure 87
Electoral demographics in 2017 (based on 2014 data)

Age as of 2014 No. of registered Share in total
voters in 2017 (m) registered voters (%)
15-19 64 8
20-24 109 13
25-34 224 26
35-49 254 30
50-59 105 12
60+ 97 11
Total 853 100

Emotional factors
Death of popular leader Indira Gandhi, prime minister and daughter of India’s first prime minister, Jawaharlal
ahead of polls can create a Nehru, was assassinated in 1984. The country was moved emotionally and voted in her
wave in favour of the party
son, the inexperienced Rajiv, with a super majority of 411 seats out of 542. The 1970s
saw Congress lose some national appeal after the more authoritarian Indira had declared
a state of emergency, protecting herself from a guilty verdict delivered by a court in
relation misusing state machinery in the 1971 election. The lost support seemed to be
recovered quickly as all Congress supporters came together in support of her son.
Kargil war issue helped BJP BJP’s Atal Bihari Vajpayee ran a fractured mandate for 13 months in 1998-1999,
immensely in 1999 before a re-election in mid-1999. His handling of the Kargil War (in May and
June, when Pakistani troops, posing as militants, occupied several border hilltops)
and the swift military operation forced the enemy to withdraw. Atop a wave a
patriotic fervour that swept the nation, the BJP-led NDA-1 won a comfortable
and stable majority.
Another contentious affair played a prominent role in BJP originally gaining

power in the 1990s. In what has become known as the “Ram temple” (Ram
Janmabhoomi) issue, Hindus contend that a structure at a now-demolished
mosque in the city of Ayodhya was the birthplace of, and temple devoted to, Lord
Ram. The Supreme Court took up the controversial case in 2011 and final
arguments commenced this year. The timing of the verdict is yet unknown and
the situation has become more complex as current Chief Justice of the Supreme
Court Dipak Misra is due to retire in October. Given the sensitive nature of this
case, a potential resolution could have a significant impact politically.

Figure 88
Ram temple case can be Brief timeline of Ram Janmabhoomi issue

particularly relevant in UP Year Event
as Ayodhya in the state
1990 BJP party president LK Advani conducts a nationwide tour to garner support for
construction of a Lord Ram temple at the site of a disputed mosque in Ayodhya
1992 The mosque is destroyed by a large number of Hindu supporters gathered at the site.
Nationwide ‘communal’ violence follows
2010 Allahabad High Court in UP splits the site into three equal parts to - Lord Ram, Nirmohi
Akhara (the organisation that filed the original case) and the Sunni Wakf Board
2011 Supreme Court stays the high-court verdict
2017 Supreme Court suggests out-of-court settlement between parties but this is rejected
2018 Supreme Court starts to hear final arguments in case

Source: CLSA
Does momentum in the run-up to general elections matter?

There are four state elections scheduled for December 2018, before the general
election in 2019. Barring the state of Mizoram, which only has one Lok Sabha
seat, the other three states of Madhya Pradesh, Rajasthan and Chhattisgarh are
currently ruled by BJP. Potential reversals here at the end of this year could hurt
morale and be a timely boost for the opposition. We know there are significant
differences in state/national-poll voting patterns, and BJP will face strong anti-
incumbency in all three states, particularly Rajasthan, which has a history of
alternating between Congress and BJP.
Figure 89
Four large states are up for State election calendar (remainder of 2018)
re-election in 2018 and will State Date LS seats¹ LS seats (%) RS seats² RS seats (%)
set the stage for 2019
Chhattisgarh December 11 2.0 5 2.0
Madhya Pradesh December 29 5.3 11 4.5
Mizoram December 1 0.2 1 0.4
Rajasthan December 25 4.6 10 4.1

Source: CLSA, Election Commission. ¹ Lok Sabha (lower house), ² Rajya Sabha (upper house)
That said, data utility for state elections held close to a general election may be
limited. Data from key state elections close to the national polls show that BJP
won the three bigger states of MP, Rajasthan and Chhattisgarh in 2003, while
Congress won only in Delhi and Meghalaya. The following year, however,
Congress performed better than BJP and formed the government. Similarly, in
2008, BJP won the bigger states of MP, Karnataka and Chhattisgarh, while
Congress won three north-eastern states and Delhi. In the 2009 general election,
Congress was however able to easily form a government with its alliance
partners.

Section 4: Market impact India strategy
Market impact
Market already factoring During the week of the 2004 and 2009 elections, equity markets swung over 20%
in a Modi win due to result surprises. In 2014, however, the market moved up on the
anticipation of a Modi win as politics became the focus in market-related talks
and actively-tracked political developments. We believe this time will be similar in
terms of tracking of opinion polls, state elections results, party switching by
politicians, formation of political alliances, development of emotional issues like
the status of the Ram temple legal case, etc.
We advocate a In the run up to elections, we advocate for a defensive portfolio comprising rural
defensive portfolio consumption, housing, exporters as the market has already factored in a Modi
win. Any data point aimed to the contrary could potentially drive market
underperformance. Our top picks are ITC, M&M, Sun Pharma, Infosys, HDFC,
IndusInd bank, Dabur, Godrej properties and Maruti. We believe that the housing
& rural recovery will play out irrespective of the election outcome due to strong
industry fundamentals and policy initiatives.
Investor sentiment may be Sustained impact on equity markets well beyond the election results is unlikely.
impacted, but little real The reason is that while results impact investor sentiments, the impact on the real
effect on economy economy may not be that much and hence any potential market reaction could
prove to be an opportunity to act for investors.
How does the market behave around elections?

Market prices in expected Analysis of the past three general elections in 2004, 2009 and 2014 reveals that
election results early the equity markets slowly begin to price in the expected election results in the
lead up. In the preceding six months, the market usually received inputs like the
results of the opinion polls, results of the state elections and also some qualitative
information about the response to the election rallies, possible pre-poll alliances,
or politicians switching parties, etc. After the surprise election results of 2004
and 2009, investors have started paying more attention to political developments.
Figure 90
Market behaviour in the previous three election cycles
Six months before elections Election-result week Six months after election
Early election call led to a small 5ppt 11ppt underperformance as Reform-friendly pairing of
2004: UPA
underperformance but the market NDA loses power; UPA needs Manmohan Singh/P Chidambram
defeats NDA
was expecting NDA to retain power. communist support. drives 13ppt outperformance.
The UPA expected to retain power as 30ppt outperformance as UPA India performs in line with
2009: UPA
per the opinion polls; India performed comes to power with a larger region, with no change in policies
retains power
in line with the region. mandate and stable gov’t. vis-à-vis UPA 1.
Strong NDA performance in Dec-13

7ppt outperformance as BJP Initial reform actions like fiscal
2014: NDA polls/subsequent opinion polls raises
wins a majority on its own, the consolidation/inflation-targeting
defeats UPA hopes of a strong central coalition
most stable gov’t for 30 years. drive a 9ppt outperformance.
and leads to a 7ppt outperformance.
Note : For market performance we have used MSCI India (US$) and the MSCI AxJ as the benchmark indices. Source: CLSA, Bloomberg
Markets demand stability Equity markets like a stable government headed by a leader with a strong
development/reform agenda. Any anticipated move towards this election
outcome drives market outperformance. As can be seen below, when the
elections results don’t conform with market expectations, this creates significant

volatility during the results week. The trend, however, doesn’t necessarily stick.
During 2004 and 2009, the market changed considerably. After 2014, it stuck for
a considerable period, ie, six months, but reversed eventually.
Results week can lead In the 2004 and 2009 elections, the respective NDA and UPA governments were
to wild swings expected to come back to power and as such, India’s performance was broadly in
line with that of the region. In 2014, markets were expecting a change to a more
stable, market-friendly and development-oriented government and began
outperforming, particularly with incremental opinion/state polls pointed in that
direction. The performance during results week is always in the context of these
expectations (margin of victory, change in ruling parties) and all the election weeks
have been volatile, seeing market moves of 8-22%. Thereafter, the policies of the
government decide what happens, as it should. Post elections, the next important
event for the market is the budget presented by the new government in July.
Voting for national election Voting for national elections are held over several phases (for the 2014 elections,
for 2014 occurred over five first round of voting was held on 7 April and the final round of voting took place
weeks and nine phases on the 12 May spread over nine rounds of voting). Exit polls are published after
the round of polling is over. The formal counting of votes and election result is
usually announced a few days later. For example the voting for 2014 elections
was over on the 12 May and the exit polls (more reliable than opinion polls) were
published on the same day evening and the final election results were announced
on the 16 May. While the exit polls are published at the end of all the rounds,
whispers can possibly spread much earlier.
Figure 91
Markets start sniffing Nifty Performance during 2014 election events

election results beforehand 7,800 (Rs)
16 May: results released
7,600 12 May:
polling ends, exit
7,400 polls released
7,200
Market starts
7,000 pricing NDA win
6,800
6,600 7 April: polling starts
6,400
1 Apr 14 16 Apr 14 1 May 14 16 May 14 31 May 14 15 Jun 14 30 Jun 14
The 2019 scenario

Modi leading coalition with In 2019, market is likely to take a similar route to elections and beyond. We
reduced majority is market believe that the current base case is for Modi to retain power but the mandate is
base case not likely to be as strong as it was during 2014. We believe that the market
currently expects a slightly weaker but still a Modi-led coalition government.
Despite opposition unity talks and some adverse political developments, India has
actually outperformed the region and its PE premium is at a 26-month high (see
Figure 93. Unless this base case changes as incremental data points come
through, the market may be lack lustre running up to May 2019. Needless to say,
the re-election of Modi with another majority mandate would be a market
positive as political stability is assured.

Figure 92
Possible 2019 scenarios and likely market outcome
2019
Market outcome Stocks
scenarios
 Positive: Recent political setbacks for BJP and opposition unity has Capex cycle plays:
Modi-led
driven markets to expect a weaker coalition than current in 2019 Cement, Infra & Cap
majority BJP
 Modi’s ‘2022’ themed policies/revival in capex cycle will gain traction goods, corporate banks,
government
 10-15% probability, if opposition combines in the state of UP housing, mid caps
Discretionary
Modi-led  This is the base case for markets. 50-55% probability
consumption, Pharma,
coalition  Populist pressures may rise but Modi’s priorities unlikely to change
housing
Congress-led  Congress would need about 150 seats. 5-10% probability.

Consumption, Housing,
strong  Domestic flows could shift to physical assets if inflation rises
Pharma
coalition  Market may react in knee jerk manner – a potential buying opportunity
 25-30% probability. Government may not last full term.

Weak  A steep 10-20% market correction possible. Investor sentiment may
IT, Pharma
coalition remain weak for an extended period.
 Selective buying opportunities for long-term investors post correction.
Source: CLSA
Buy the dip? The other options viz a non-Modi/non-BJP government would initially trigger a
negative reaction in the markets. After polls though, market would take its cues from
the stability of the ruling coalition and government policies. If the market were to dip
significantly due to an unexpected market-unfriendly election verdict, ie, a weak
coalition, it might turn out to be an opportunity to buy for a long-term investor.
Market not building in political risks

Premium valuation imply Even as political uncertainty has risen lately, with BJP seeing a series of political
market is ‘not prepared’ for disappointments/opposition unity; the Indian markets have actually outperformed
a non-Modi outcome regional peers. India’s PE premium vs regional peers is at a 26-month high of 44%.
This has led us to believe that the market is not prepared for a non-Modi election
outcome.
Figure 93
A 26-month high premium MSCI India’s PE premium to MSCI AxJ

70 (%)
MSCI India premium to MSCI AxJ Average premium
60
50
40
30
20
10
(10)
(20)
Apr 06
Apr 07
Apr 08
Apr 09
Apr 10
Apr 11
Apr 12
Apr 13
Apr 14
Apr 15
Apr 16
Apr 17
Apr 18
Oct 05
Oct 06
Oct 07
Oct 08
Oct 09
Oct 10
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Oct 17

On its own, the Nifty trades at +1sd above the 10-year average on a PE basis. The
bond yield to earning yield gap is also at a level of 2.1%, which have historically
led to weak market performance 12 months down the line.
Figure 94
Market PE moderated Nifty one-year forward PE

marginally but 20 (x) One-year forward PE Average +1sd -1sd
remains elevated
18
16
14
12
10
8
Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17
Source: Bloomberg
Figure 95
Earnings yield gap with Earnings yield (1 (one)/Nifty PE) less bond yield (10-year benchmark government bond)
bond yield at 2.1%, a level 3 (%)
which doesn’t usually
sustain 2
(1)
(2)
(3)
(4)
(5)
(6)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Bloomberg
Domestic flows can be influenced by election outcome

Modi’s inflation targeting One of the hallmarks of Modi’s government (highlighted in Section 1) has been
framework adoption led to the inflation-targeting framework adoption, which led to positive real rates in
a boon in financial savings India since May 2014. CPI inflation has recently shown signs of rising above the
preferred 4% target, partly on rising crude prices. However, the government’s
intention on inflation targeting has been steadfast. This has resulted in a move
from physical assets to financial assets and, as a consequence, strong domestic

flows in the stock markets since May 2014. We believe that if Modi were to lose
the election, it would have a big sentimental impact on domestic investors, who
can impact domestic flows - a potential negating factor for Indian markets.
Figure 96
Domestic flows could take a Net inflows* in domestic mutual funds

sentiment hit if Modi (US$m)
6
doesn’t return to power Net equity-fund inflow adjusted for arbitrage funds
5
(1)
(2)
(3)
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Jul 14
Dec 14
Jul 15
Dec 15
Jul 16
Dec 16
Jul 17
Dec 17
May 14
Sep 14
Jan 15
May 15
Sep 15
Jan 16
May 16
Sep 16
Jan 17
May 17
Sep 17
Jan 18
May 18
FY10
FY11
FY12
FY13
FY14
Apr 14
Aug 14
Aug 15
Aug 16
Aug 17
FY09
Oct 14
Feb 15
Mar 15
Apr 15
Oct 15
Feb 16
Mar 16
Apr 16
Oct 16
Feb 17
Mar 17
Apr 17
Oct 17
Feb 18
Mar 18
Apr18
Nov 14
Nov 15
Nov 16
Nov 17
*Ex of ETFs. Consider 65% of flows to balanced fund as equity. Source: CLSA, AMFI, Bloomberg
Policy logjam if non-BJP government

One of the issues facing a minority/non-BJP government could be the difficulty in
passing bills in parliament. The BJP faced a similar issue in the upper house (Rajya
Sabha) of parliament as Congress was the largest party when BJP gained power in
2014. Since then, subsequent state victories have improved BJP’s position so that
it is the largest party now and we estimate that its position, along with that of its
allies, will only strengthen by 2020 to control nearly 44% of the upper house. If
we add certain other currently ‘non-aligned’/potential BJP allies (AIADMK, Shiv
Sena, TRS, BJD, TDP), BJP and allies would well be in majority in upper house,
making legislative business for a non-BJP government tough.
Figure 97 Figure 98
Party position in Rajya Sabha as of July 2018 Rajya Sabha seat projections for BJP and allies
125 (Seats)
Vacant Majority = 123
BSP All others 0.4%
RJD 1.6% 9.0%
100 2 13
2.0%
Trinamool
5.3% BJP
75
SP 28.3%
5.3%
Left parties 107
50
2.9% 92
BJP allies
Congress 6.1%
20.5% Nominated 25
3.3%
Shiv Sena
1.2% 0
TDP
TRS BJD AIADMK
2.5% BJP & allies 2019 2020 2020
2.5% 3.7% 5.3%
(ex-TDP, tally
Shiv Sena)
Source: CLSA, Rajya Sabha Source: CLSA, Rajya Sabha

Equity markets were surprised in the past three elections

Equity markets were quite volatile during the past three election weeks indicating
that the market was surprised with the outcome. During the 2014 elections, the
possibility of a change of government in favour of a pro-development/pro-
reforms Modi government was quite visible and those who were able to catch
onto that wave earlier, could enjoy a 12-month of outperformance to the tune of
37-31% over MSCI EM and MSCI AxJ.
The market did not anticipate NDA’s defeat in 2004

An initial shock Although the NDA government had called early elections in 2004, the opinion
polls indicated that the incumbent BJP would claim victory with a repeat
mandate. As such, in the run up to elections, markets were performing only
slightly below regional peers. Instead, Congress aligned with left-wing partners to
put together a comfortable majority of more than 335 members out of 543,
completely catching markets off-guard.
Figure 99
Opinion polls in lead up to Opinion poll projections (2004)
2004 elections were Polls in 2004 Congress UPA+allies BJP NDA+allies
way off the mark AC Nielsen (NDTV + Indian Express) 100 150 200 287
India Today (first survey) - 115 - 335
Mean estimate 100 133 200 311
Actual outcome 145 218 138 181
Poll error (seats) 45 86 (62) (130)
Source: CLSA
The markets underperformed by 11ppts in the election result week reflecting

popular sentiment that the new government, particularly with communist party
support, would find it difficult to continue with broad market reforms and
infrastructure development initiated by the BJP.
Figure 100 Figure 101
MSCI India vs MSCI AxJ (2004 performance) MSCI India vs MSCI AxJ (after 2004 election performance)
120 (Indexed) 165 (Indexed)
MSCI India MSCI AxJ MSCI India MSCI AxJ
115
155
110
105 145
100 135
95
90 125
85 115
80
105
75
70 95
Jan 04 Mar 04 May 04 Jul 04 Sep 04 Nov 04 May 04 Jul 04 Sep 04 Nov 04 Jan 05 Mar 05 May 05
Source: CLSA, Bloomberg Source: CLSA, Bloomberg
Six months later, however, India’s underperformance had been reversed. The
Policy reversal newly formed government was headed by Dr Manmohan Singh, viewed as the
driver of India’s 1991 reforms. Mr P Chidambaram was the Finance Minister, who
had earlier given a ‘dream budget’ (lower taxation, major capital markets reforms,
etc) in 1997. While the disinvestment programme of NDA was shelved, the UPA
government continued the infrastructure development agenda, particularly with a
high focus on the Public Private Participation (PPP) model. The fact that the
coalition was also fairly stable and not reminiscent of the turbulent 1996-99
years also helped to calm market nerves.

UPA’s 2009 victory was bigger than predicted

Widespread belief that Most pundits and opinion polls in 2009 predicted that a Congress-led UPA-Left
Congress would receive a coalition would form government. As such, anticipating no change in regime or
weak mandate in 2009 political situation, the markets performed in line with the regional peers in the run
up to the elections.
Figure 102
Congress won 30% more Polls in 2009 underestimated Congress’s ability to bag better numbers
seats than was predicted Polls in 2009 Congress UPA+allies BJP NDA+allies
Star-Nielsen 155 203 147 191
Deccan Chronicle 157 193 132 177
The Times of India 154 198 135 176
The Week 144 198 140 186
India Today¹ - 200 175 -
Reuters 139 - 129 -
DNA - 184 - 177
Median estimate 154 198 138 177
Actual outcome 206 262 116 159
Poll error (seats) 52 64 (22) (18)
¹ No separate projection available for Congress. Source: CLSA
Outperformance lasted for This time the markets were in for a positive surprise as Congress and its electoral
only one week and was allies won 261 of the 543 seats - the best result by any party since 1991. The
difficult to have been indices gave a “big thumbs up”, registering a record 17% one-day gain. Now rid of
captured by investors the leftist Communist Party of India (Marxist), the market expected Congress to be
more politically stable and pro-economic reform. However, this outperformance
was only lasted for that week. The government policies in UPA-2 were more-or-less
the same as before, ie, there was no perceived change in longer-run reform pace.
Over the next 6-12 months, India performed in line regionally.
190 135
170
125
150
115
130
105
110
90 95
70 85
Modi’s 2014 victory margin was a positive surprise

Indian equity markets The 2014 election was a change election for India. The UPA had become a
started outperforming well minority government much before 2013 as several allies withdrew support. By
ahead of the results late 2013, particularly post the state elections of December 2013, the markets
anticipating a pro-growth had started building in hopes of an NDA government, which the market perceived
government would reverse UPA-2’s ‘policy paralysis’. As such, India outperformed regional
markets - even pre-election results. The results of the 2014 polls, however, were
still a surprise as the BJP emerged with enough on its own with 282 seats. The
strong mandate led to the markets outperforming by another 7ppts during the
results week.

Did you know?
Indian elections under the spotlight
 In 2014’s elections, 834.1m people  Chennai South had the most  In 2014, the highest share of the  Among major parties, Trinamool
(more than the population of contestants in a single vote for a seat in was in Surat Congress (West Bengal) has the
Europe) were eligible to vote - an parliamentary constituency, with (Gujarat), where Darshana Vikram largest proportion of female
increase of 100m from 2009. 42. Jardosh from the BJP won with candidates among their won seats -
547.8m voted. 75.75%. The party won all 26 seats over 30%.
 Tura, in Meghalaya, had the lowest in Gujarat, with over 50% of the
 There were 930,000 polling number of candidates, with two. total vote.  Uma Soren of Trinamool Congress
stations, 1.8m electronic voting is the poorest MP in this
machines (EVMs) and 10m people  The highest victory margin in 2014 parliament, with total assets of less
 India had its largest voter turnout
working on the ground. was that of Narendra Modi, from than Rs500,000.
for any general election in 2014,
Vadodara in Gujarat. He defeated
 Designated expenses for each with 66.4%. The previous high was
his nearest rival, Mistri
candidate were capped at Rs7.0m 64.01% in 1984.  Telugu Desam Party's Jayadev Gala
Madhusudan Devram of the Indian
per constituency in bigger states (R) from Andhra Pradesh is the
National Congress party, by
and Rs5.4m in smaller ones.  Dhubri, in Assam, had the highest richest MP, with assets totalling
570,128 votes. Modi also won the
voter turnout in 2014, at 88.4%; Rs6.83bn. Gala, managing director
Varanasi seat by over 371,000
 Malkajgiri (Telangana) had the the seat was won by the AIUDF. of listed Amara Raja Batteries, won
votes.
largest number of registered voters the Guntur seat.
in one constituency (3,183,325)  The 2014 election was the first  Shri Thupstan Chhewang of the
and the highest number of valid time in a general election when BJP secured the smallest winning  India’s election commission will
votes polled (1,624,859). voters had a "none of the above" margin - 36 votes - at Ladakh. monitor the production, storage
(Nota) option, in response to and distribution of liquor during the
 Lakshadweep had the lowest  The oldest MP after 2014’s general
activist groups who said voters general election.
number of electors in a election is Shri LK Advani of the
were too often forced to choose
constituency (49,922 registered BJP (86 years old).
between several candidates with  Parties can use “dummy’ or “clone”
voters).
criminal backgrounds. Nota polled candidates to confuse voters and
 Shri Dushyant Chautala of the
 Banej, a small settlement in the Gir over 6.0m votes, 1.1% of the total, split votes; Mahasamund (in the
Indian National Lok Dal party is the
Forest, Gujarat, has just one voter. making it the 6th largest vote. central state of Chhattisgarh) had
youngest MP (26).
Mahant Bharatdas (59) is the only eight candidates named Chandu Lal
resident; the district government  Bahujan Samaj Party, India’s third-  Post 2014, there are 61 women Sahu and three named Chandu Ram
sets up a special polling booth, with largest party in terms of number of (the highest number ever) MPs out Sahu. Five of the 35 candidates in
five staff, just for him. votes (4.19%), did not win a seat. of a total of 543; 640 out of 8,251 Bilaspur (also in Chhattisgarh) were
candidates were women. called Lakhan Sahu.
130
125 115
120
110
115
110
105
105
100 100
95
90 95
Investors catching the trend Even six months after the elections, markets outperformed as Modi’s reformist
could outperform for a good policies began taking shape and a policy for curtailing inflation brought
12 month period households savings into financial instruments viz mutual funds vs physical assets.
India’s outperformance finally gave way in 2015, a good six to eight months after
the elections results as the economic/capex-cycle upturn was visibly delayed
after the banking systems’ NPLs started rising sharply.
Housing should be politics proof

Our analysis of post-election scenarios and likely government policies suggest
that a theme common to all governments is likely to be the housing theme. We
have detailed our argument for a turnaround in India’s housing cycle in our
Housing boom report of 2017. The report identifies a surge in affordable housing
building across the nation and improved affordability following weak pricing cycle
as key turnaround reasons for the housing market.
Figure 107
Affordability at best-in- Mortgage payment to post-tax income ratio for a mid-income apartment (US$90,000)
decade levels (%)
60 56
54
49
50 46 46
45 45
41 41
40 38
36
34 35
34
31 31 30
30 28 27
20
10
0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
Source: CLSA, SBI

Major scale up in affordable To kickstart the affordable housing cycle, Modi’s ambitious Housing for All
housing budget allocations programme was launched in 2016. The schemes for urban housing were designed
is underway and launched starting 2017, particularly as Modi expanded the Credit-linked
subsidy scheme (CLSS), which was part of the Housing for All (Pmay urban)
programme. The budget for the Pmay urban housing scheme is proposed to be
raised by 5x in FY19, with the government opening up funding for the same via
off budgetary methods such as loans taken by government agencies.
Pmay rural allocations Pmay urban allocations

350 (Rsbn) 350 (Rsbn)
Budget Outside budget Budget Outside budget
300 300
250 250
200 200
150 150
100 100
50 50
0 0
FY15 FY16 FY17 FY18RE FY19BE FY15 FY16 FY17 FY18RE FY19BE
Source: CLSA, Ministry of finance (budget documents) Source: CLSA, Ministry of finance (budget documents)
NREGA shows popular schemes can be politics proof

BJP ridiculed the NREGA Meanwhile, one can argue that previous government schemes were subject to
scheme but kept on raising political whims of the ruling party, but the Indian context of policy
spending implementation shows otherwise. The rural employment guarantee scheme was
ridiculed by Modi himself in speeches in parliament, but after making some
changes to the programme’s direction in terms of implementation, NREGA has
actually surged to higher highs in terms of budget allocation. Also, the context of
rural/agrarian protests and loan waivers has meant that NREGA still remains a
powerful political tool.
Figure 110
Actual spending on rural Budgeted versus actual expenditures on rural employment guarantee scheme
employment has exceeded (Rsbn)
700 Budgeted expenditure on rural employment
the budgeted allocation in
Actual expenditure on rural employment guarantee scheme
recent years ?
600 550 550
482 480
500
385
400 347
337
300
200
100
0
FY16 FY17 FY18 FY19BE
Source: Ministry of Finance

Several schemes to promote Similar to the above, we believe that the Pmay urban programme will become an
Urban housing by important one to tackle mass housing shortage in cities. Also, with 5m+
government apartments approved for construction and incrementally private sector focussing
on affordable housing supply (interest subsidy schemes helping too), the
government may not curtail the policies here.
Figure 111
Pmay urban housing Scale up of Pmay urban housing scheme

scheme will be tough to roll
back 6 (m)
Pmay - Urban houses sanctioned Construction started Completed
5.1
5
4.6
4.1
4 3.7
2.9
3 2.8
2.4
2.1
1.9
2 1.8
1.7
1.5
1.2
1.0
1 0.7 0.8
0.4
0.3 0.3
0.2 0.2 0.2
0.1
0.0
0
Jan 17 Apr 17 Jul 17 Sep 17 Jan 18 Mar 18 May 18 Jun 18
Source: CLSA, Ministry of Housing and Urban Development
Inflation may boost housing Meanwhile, the broader context of prolonged property price sluggishness has
cycle following years of meant that affordability has improved to best in more than decade levels, raising
weak pricing
the end customer demand prospects. Also, a change in political mindset to
inflation might end up helping property sales, particularly in premium end, as
investor demand for physical assets rises again.
Rural theme to do well near term

Populist tilt of the The Modi government’s tilt to the rural/agricultural side has been incrementally
government benefits rural visible from 2016 onwards, starting with the promise of farm loan waiver ahead
incomes more of the UP state elections. The election promise was made consequent to the
increasing farmer protests across India, which had their roots in the weak
agricultural commodity prices. Various state governments, since then, have
announced over US$20bn in farm loan waivers, providing support to rural
income/expenditures. The double-digit hikes given for farm produce for summer
crops in 2018 should also trigger a boost to rural incomes by US$20bn as the
hikes get implemented, as highlighted in our July 2018 strategy report. Several
other such bottom-of-pyramid schemes of the centre viz rural housing, jobs
guarantee, power for all, health for all, etc, mostly benefit the rural population.

Figure 112
With rural wage growth in Monthly trend in average rural wages

the mid to low single-digits, (% YoY)
20
supporting rural incomes is
a key government priority 18
16
14
12
10
0
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Jan 12
May 12
Jan 13
May 13
Jan 14
May 14
Jan 15
May 15
Jan 16
May 16
Jan 17
May 17
Jan 18
Source: CLSA, Ministry of labour and employment, CMIE
Farmer benefit schemes like State governments are also doing their bit beyond farm loan waivers. Telangana
fixed subsidy per cropping announced free power for farmers and a Rs4,000/acre cash subsidy. Karnataka
season are being promoted
announced a Rs5,000/ha cash subsidy in certain areas. Madhya Pradesh’s
by state governments
minimum support price (MSP) scheme called Bhavantar has already been
extended for FY19 and is likely to become the national model scheme for
implementing higher agricultural procurement. Uttar Pradesh has upped the
procurement volume of potatoes. This concerted effort by states and the central
government to keep the rural population satisfied should continue till elections.
Figure 113
Multiple farmer support Key recent state-government rural-focussed initiatives

initiatives by state State Measure FY19 budgetary
governments costs (Rsbn)
Madhya Pradesh Price-gap alleviation scheme for crops trading below MSP; 10
likely to be replicated by central government.
Haryana BBY scheme implemented for perishable crops viz potato, 1
onion, tomato and cauliflower.
Telangana Input assistance scheme Rythu Bandhu to provide direct cash 120
assistance for purchasing agri input.
Karnataka Raita Belaku scheme similar to Telangana scheme of direct 35
subsidy; limited to dry lands.
Telangana 24/7 uninterrupted free power to farmers. na
Telangana Rs0.5m life insurance free to farmers. c.10
Uttar Pradesh Higher procurements done (20-40%) and targeted (up to na
100%) at key crops viz wheat, paddy, sugarcane and potato.
Bihar Premium free insurance cover for a wide range of crops, na
based on weather conditions.
Rajasthan Crop insurance expanded to fruits and vegetables, and na
payouts linked to weather.
Rajasthan Farm loan waiver extended to include farmers with large land na
holdings; free accident insurance cover up to Rs1m for all
farmers taking agri credit.
Source: CLSA

Preferred stocks to navigate the politically charged atmosphere

Advocate a defensive Running up to the elections, we advocate a defensive portfolio. As highlighted
portfolio above we believe that the rural consumption and housing theme are likely to be
relatively immune to political upheaval and prefer to play these via M&M and
Dabur for rural and HDFC & Godrej Properties for housing. We also like ITC as a
defensive consumer stock, it has reasonable valuations and risks to important
tobacco taxation changes are low in the near term. A bout of market volatility,
which possibly leads to FII pullout would also cause the rupee to depreciate
against the US dollar. In such a case, exporters would be the beneficiary. We
prefer Sun Pharma and Infosys for similar reasons.
Figure 114
Valuations of preferred stocks

Stock Mkt cap PE (x) PB (x) ROE (%) Current Rec Target TSR
(US$bn) FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL price (Rs) (Rs) (%)
Dabur 11.6 51.7 44.8 14.5 12.3 27.7 29.6 458.8 BUY 500 9.8
Godrej Properties 2.3 134.9 45.5 6.1 5.5 5.8 12.8 708.2 BUY 1,097 54.9
HDFC¹ 46.3 11.2 8.7 2.2 1.7 15.6² 16.5² 1,912.7 BUY 2,480 30.9
IndusInd Bank¹ 17.0 26.5 21.2 4.5 3.8 17.5 18.7 1,976.0 BUY 2,350 19.6
Infosys 43.3 18.8 17.0 4.4 4.4 23.9 25.7 1,384.3 BUY 1,560 17.2
ITC 54.7 31.6 28.1 6.7 6.0 22.3 22.5 312.8 BUY 390 26.6
M&M³ 17.1 24.1 20.6 3.5 3.1 15.4 15.9 957.6 BUY 1,120 17.9
Maruti 39.4 29.0 24.2 5.8 5.0 21.2 22.1 9,105.1 BUY 11,300 25.2
Sun Pharma 21.8 33.2 24.7 3.6 3.2 11.4 13.8 635.3 BUY 750 18.6
Note: Price as at 21 Aug 2018. ¹ Adjusted for 100% NPL coverage and investment in subs (for IIB and HDFC). ² Core ROE for HDFC.³ Showing consolidated PE.
Source: CLSA

India strategy
Company profiles
Dabur .............................................................................................................................. 77
Godrej Prop ................................................................................................................... 83
HDFC .............................................................................................................................. 89
IndusInd Bank ................................................................................................................ 93
Infosys ............................................................................................................................ 97
ITC................................................................................................................................. 103
Mahindra ...................................................................................................................... 109
Maruti Suzuki .............................................................................................................. 115
Sun Pharma .................................................................................................................. 121
All prices quoted herein are as at close of business 21 August 2018, unless otherwise stated

India strategy
Notes

Dabur
Rs458.80 - BUY
Vivek Maheshwari Ayurveda king

vivek.maheshwari@clsa.com Macro tailwinds and superior execution to drive growth and margins
+91 22 6650 5053
A key beneficiary of a pick-up in rural consumption amid lower competitive
Bhavesh Pravin Shah intensity, Dabur is in a sweet spot where it will also continue to benefit from
+91 22 6650 5009 changing consumer preferences for Ayurveda/naturals products. It has
sharpened its focus on growth and pace of innovation, and new launches are set
to accelerate. Despite rising input prices there are no margin concerns. Premium
valuations should sustain and the company remains our top pick with a target of
Rs500 (45x September 20CL earnings).
Beneficiary of changing consumer preferences

23 August 2018 Changing lifestyles, rising income and greater awareness are influencing
consumer preferences towards Ayurveda/naturals products. Dabur is the largest
India manufacturer globally, with a diversified portfolio exceeding 380 products and
Consumer over 1,000 SKUs. It has a strong brand portfolio - 16 brands with a turnover of
more than Rs1bn and three brands with turnovers overRs10bn - along with strong
Reuters DABU.NS R&D infrastructure and 130 years of experience.
Bloomberg DABUR IS
Macro tailwinds and competitive intensity waning
Priced on 21 August 2018 Indian staples have seen a deceleration in rural growth rates in the past few years
CNX Nifty @ 11,570.9
from weak wage growth, post-demonetisation disruption and issues in post-GST
12M hi/lo Rs458.80/294.97 wholesale channel. The outlook is improving, however, with a normal monsoon
forecast, loan waivers, crop price hikes and likely fiscal incentives ahead of a busy
12M price target Rs500.00 election calendar. Dabur has one of the highest rural exposures (over 45% of
±% potential +9% revenue) and should be a key beneficiary. Pressure from Patanjali Ayurved, which
Shares in issue 1,766.3m
impacted incumbents’ market share, also seems to be behind the company. After
Free float (est.) 32.1% successful interventions, Dabur has managed to regain most of the lost market
share in the honey segment over the past two quarters.
Market cap US$11,575m
Strong focus on growth; sustained margins despite input inflation
3M ADV US$15.3m Dabur has sharpened its focus on growth with innovation/new launches set to
accelerate (four to five new products every year). This was partially visible in
Foreign s'holding 17.7%
1QFY19, where Dabur delivered stellar volume growth of over 21% YoY, and saw
Major shareholders a strong rise in advertising and promotional spend. Despite input-price inflation,
Promoters 67.9% there is no immediate margin concern as management guides to maintain it
FPIs 17.7% through operational leverage and mix improvement.
Premium valuations to sustain; maintain BUY

Dabur is trading at around 47x one-year forward earnings, which is at a premium
to its five-year-average multiples. We anticipate sustained premium valuations
Stock performance (%) and value Dabur at 45x September 20CL earnings. Maintain BUY.
1M 3M 12M
Absolute 23.0 24.6 52.8 Financials
Relative 17.0 13.2 28.8 Year to 31 March 17A 18A 19CL 20CL 21CL
Abs (US$) 21.1 21.3 40.3 Revenue (Rsm) 76,136 77,219 88,166 100,358 114,772
(Rs) (%)
470 125 Ebitda (Rsm) 15,089 16,174 18,814 21,370 24,427
450 Dabur (LHS) 120
Rel to Nifty
Net profit (Rsm) 12,769 13,689 15,623 18,033 20,872
430
115
410 EPS (Rs) 7.2 7.8 8.9 10.2 11.8
110
390 CL/consensus (36) (EPS%) - - 97 97 97
370 105
EPS growth (% YoY) 1.9 7.2 14.1 15.4 15.7
350 100
330 PE (x) 63.3 59.0 51.7 44.8 38.7
95
310
90
Dividend yield (%) 0.5 1.6 0.8 0.9 1.0
290
85 PB (x) 16.7 14.2 14.5 12.3 10.3
270
250 80 ROE (%) 28.3 25.9 27.7 29.6 29.0
Aug 16 Apr 17 Dec 17 Aug 18 Net cash per share (Rs) 14.6 18.0 16.7 22.2 28.4
Source: Bloomberg Source: www.clsa.com
Dabur - BUY India strategy
Financials at a glance
Year to 31 March 2017A 2018A 2019CL (% YoY) 2020CL 2021CL
Profit & Loss (Rsm)

Revenue 76,136 77,219 88,166 14.2 100,358 114,772
Cogs (ex-D&A) (37,554) (38,199) (43,527) (49,546) (56,949)
Gross Profit (ex-D&A) 38,582 39,019 44,639 14.4 50,812 57,823
SG&A and other expenses (23,493) (22,845) (25,826) (29,443) (33,397)
Op Ebitda 15,089 16,174 18,814 16.3 21,370 24,427
Depreciation/amortisation (1,429) (1,622) (1,747) (1,872) (2,022)
Op Ebit 13,661 14,553 17,067 17.3 19,498 22,405
Net interest inc/(exp) (540) (531) (575) (450) (250)
Other non-Op items 2,984 3,052 2,915 (4.5) 3,352 3,771
Profit before tax 16,104 17,074 19,407 13.7 22,400 25,926
Taxation (3,303) (3,354) (3,746) (4,323) (5,004)
Profit after tax 12,801 13,720 15,661 14.1 18,077 20,922
Minority interest (31) (31) (38) (44) (51)
Net profit 12,769 13,689 15,623 14.1 18,033 20,872
Adjusted profit 12,769 13,689 15,623 14.1 18,033 20,872
Cashflow (Rsm) 2017A 2018A 2019CL (% YoY) 2020CL 2021CL
Operating profit 13,661 14,553 17,067 17.3 19,498 22,405
Depreciation/amortisation 1,429 1,622 1,747 7.7 1,872 2,022
Working capital changes 1,285 (1,048) (783) (871) (1,030)
Other items (3,105) (3,343) (3,746) (4,323) (5,004)
Net operating cashflow 13,269 11,783 14,286 21.2 16,175 18,393
Capital expenditure (3,706) (2,303) (2,085) (1,500) (2,500)
Free cashflow 9,563 9,480 12,201 28.7 14,675 15,893
M&A/Others 2,443 2,521 2,340 (7.2) 2,902 3,521
Net investing cashflow (1,262) 218 255 16.8 1,402 1,021
Increase in loans - - - - -
Dividends (4,770) (4,770) (16,910) (7,927) (8,455)
Net equity raised/other (286) (1,568) (1,977) (4,967) (2,328)
Net financing cashflow (5,056) (6,338) (18,888) (12,894) (10,783)
Incr/(decr) in net cash 6,950 5,663 (4,347) 4,683 8,631
Exch rate movements 0 0 0 0 0
Balance sheet (Rsm) 2017A 2018A 2019CL (% YoY) 2020CL 2021CL
Cash & equivalents 35,450 41,112 36,765 (10.6) 41,449 50,080
Accounts receivable 6,504 7,061 8,062 14.2 9,177 10,495
Other current assets 11,067 12,562 14,343 14.2 16,326 18,671
Fixed assets 15,900 16,581 16,919 2 16,547 17,025
Investments - - - - -
Intangible assets 4,105 4,115 4,115 0 4,115 4,115
Other non-current assets 4,296 5,585 6,144 10 6,758 7,434
Total assets 77,322 87,016 86,348 (0.8) 94,373 107,820
Short-term debt - - - - -
Accounts payable 13,100 14,103 16,103 14.2 18,329 20,962
Other current liabs 4,671 5,118 5,699 11.4 6,347 7,069
Long-term debt/CBs 9,749 9,375 7,375 (21.3) 2,375 -
Provisions/other LT liabs 1,080 1,091 1,091 0 1,091 1,091
Shareholder funds 48,474 57,065 55,778 (2.3) 65,884 78,301
Minorities/other equity 248 265 303 14.3 347 398
Total liabs & equity 77,322 87,016 86,348 (0.8) 94,373 107,820
Ratio analysis 2017A 2018A 2019CL (% YoY) 2020CL 2021CL
Revenue growth (% YoY) (1.9) 1.4 14.2 13.8 14.4
Ebitda margin (%) 19.8 20.9 21.3 21.3 21.3
Ebit margin (%) 17.9 18.8 19.4 19.4 19.5
Net profit growth (%) 2.1 7.2 14.1 15.4 15.7
Op cashflow growth (% YoY) 8.2 (11.2) 21.2 13.2 13.7
Capex/sales (%) 4.9 3.0 2.4 1.5 2.2
Net debt/equity (%) (52.7) (55.4) (52.4) (59.0) (63.6)
Net debt/Ebitda (x) - - - - -
ROE (%) 28.3 25.9 27.7 29.6 29.0
ROIC (%) 46.7 46.1 50.6 56.2 62.4
Source: www.clsa.com
78 vivek.maheshwari@clsa.com 23 August 2018

Valuation details
Our target price is based on 45x Sep-20CL earnings, which is at a premium to its
five-year average PE. We use PE as our primary valuation methodology across our
universe as it better captures company growth and allows investors to easily
compare stocks across subsectors.
Investment risks
Slower-than-expected recovery, weak monsoons, a sharp rise in input costs and
heightened competitive activity are the key risks to our target price.
Recommendation history of Dabur India Ltd (DABUR IS)

Vivek Maheshwari BUY O-PF
Other analysts U-PF SELL
Stock price (Rs)
No coverage N-R
500
450
400
350
300
250
Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18 May 18
Date Rec Target Date Rec Target

31 Jul 2018 BUY 500.00 25 Nov 2016 U-PF 286.23*
02 May 2018 BUY 434.28* 27 Oct 2016 U-PF 296.10*
18 Apr 2018 BUY 409.61* 28 Jul 2016 O-PF 320.78*
04 Jan 2018 O-PF 394.80* 29 Apr 2016 BUY 320.78*
01 Nov 2017 O-PF 360.26* 29 Jan 2016 BUY 286.23*
05 Aug 2017 O-PF 345.45* 29 Oct 2015 U-PF 266.49*
Source: CLSA; * Adjusted for corporate action
23 August 2018 vivek.maheshwari@clsa.com 79

Detailed financials
Profit & Loss (Rsm)
Year to 31 March 2015A 2016A 2017A 2018A 2019CL 2020CL 2021CL
Revenue 78,064 77,616 76,136 77,219 88,166 100,358 114,772
Cogs (ex-D&A) (37,311) (37,605) (37,554) (38,199) (43,527) (49,546) (56,949)
Gross Profit (ex-D&A) 40,753 40,011 38,582 39,019 44,639 50,812 57,823
Research & development costs 0 0 0 0 0 0 0
Selling & marketing expenses (11,244) (7,716) (6,461) (6,067) (7,494) (8,731) (9,985)
Other SG&A (8,093) (7,592) (7,440) (7,220) (7,653) (8,725) (9,946)
Other Op Expenses ex-D&A (8,460) (9,701) (9,592) (9,558) (10,678) (11,987) (13,465)
Op Ebitda 12,956 15,002 15,089 16,174 18,814 21,370 24,427
Depreciation/amortisation (1,150) (1,332) (1,429) (1,622) (1,747) (1,872) (2,022)
Op Ebit 11,806 13,670 13,661 14,553 17,067 19,498 22,405
Interest income 0 0 0 0 0 0 0
Interest expense (401) (485) (540) (531) (575) (450) (250)
Net interest inc/(exp) (401) (485) (540) (531) (575) (450) (250)
Associates/investments 1,789 2,353 2,984 3,052 2,915 3,352 3,771
Forex/other income - - - - - - -
Asset sales/other cash items - - - - - - -
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 13,194 15,538 16,104 17,074 19,407 22,400 25,926
Taxation (2,512) (2,999) (3,303) (3,354) (3,746) (4,323) (5,004)
Profit after tax 10,681 12,539 12,801 13,720 15,661 18,077 20,922
Preference dividends 0 0 0 0 0 0 0
Profit for period 10,681 12,539 12,801 13,720 15,661 18,077 20,922
Minority interest (26) (28) (31) (31) (38) (44) (51)
Net profit 10,655 12,512 12,769 13,689 15,623 18,033 20,872
Extraordinaries/others 3 0 0 (145) 0 0 0
Profit avail to ordinary shares 10,658 12,512 12,769 13,544 15,623 18,033 20,872
Dividends (4,154) (4,222) (4,770) (4,770) (16,910) (7,927) (8,455)
Retained profit 6,504 8,290 7,999 8,774 (1,287) 10,106 12,416
Adjusted profit 10,655 12,512 12,769 13,689 15,623 18,033 20,872
EPS (Rs) 6.1 7.1 7.2 7.8 8.9 10.2 11.8
Adj EPS [pre excep] (Rs) 6.1 7.1 7.2 7.8 8.9 10.2 11.8
Core EPS (Rs) 6.1 7.1 7.2 7.8 8.9 10.2 11.8
DPS (Rs) 2.0 2.3 2.3 7.5 3.5 4.0 4.5
Profit & loss ratios

Growth (%)
Revenue growth (% YoY) 10.7 (0.6) (1.9) 1.4 14.2 13.8 14.4
Ebitda growth (% YoY) 13.8 15.8 0.6 7.2 16.3 13.6 14.3
Ebit growth (% YoY) 13.4 15.8 (0.1) 6.5 17.3 14.2 14.9
Net profit growth (%) 16.5 17.4 2.1 7.2 14.1 15.4 15.7
EPS growth (% YoY) 15.6 17.3 1.9 7.2 14.1 15.4 15.7
Adj EPS growth (% YoY) 15.6 17.3 1.9 7.2 14.1 15.4 15.7
DPS growth (% YoY) 11.1 12.5 0.0 233.3 (53.3) 14.3 12.5
Core EPS growth (% YoY) 15.6 17.3 1.9 7.2 14.1 15.4 15.7
Margins (%)
Ebitda margin (%) 16.6 19.3 19.8 20.9 21.3 21.3 21.3
Ebit margin (%) 15.1 17.6 17.9 18.8 19.4 19.4 19.5
Net profit margin (%) 13.6 16.1 16.8 17.7 17.7 18.0 18.2
Core profit margin 13.6 16.1 16.8 17.7 17.7 18.0 18.2
Op cashflow margin 13.3 15.8 17.4 15.3 16.2 16.1 16.0
Returns (%)
ROE (%) 35.7 33.4 28.3 25.9 27.7 29.6 29.0
ROA (%) 17.0 17.1 14.8 14.2 15.9 17.4 17.9
ROIC (%) 44.9 49.9 46.7 46.1 50.6 56.2 62.4
ROCE (%) 67.3 78.0 75.6 75.1 84.2 95.2 107.8
Other key ratios (%)
Effective tax rate (%) 19.0 19.3 20.5 19.6 19.3 19.3 19.3
Ebitda/net int exp (x) 32.3 30.9 27.9 30.5 32.7 47.5 97.7
Exceptional or extraord. inc/PBT (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dividend payout (%) 33.0 31.6 31.0 96.5 39.5 39.1 38.0

Balance sheet (Rsm)

Cash & equivalents 21,864 28,500 35,450 41,112 36,765 41,449 50,080
Accounts receivable 7,105 8,092 6,504 7,061 8,062 9,177 10,495
Inventories 9,733 10,965 11,067 12,562 14,343 16,326 18,671
Other current assets - - - - - - -
Current assets 38,702 47,557 53,021 60,735 59,170 66,952 79,245
Fixed assets 13,005 13,623 15,900 16,581 16,919 16,547 17,025
Investments - - - - - - -
Goodwill 4,105 4,105 4,105 4,115 4,115 4,115 4,115
Other intangible assets 0 0 0 0 0 0 0
Other non-current assets 3,533 4,038 4,296 5,585 6,144 6,758 7,434
Total assets 59,345 69,323 77,322 87,016 86,348 94,373 107,820
Short term loans/OD - - - - - - -
Accounts payable 10,953 13,301 13,100 14,103 16,103 18,329 20,962
Accrued expenses - - - - - - -
Taxes payable 0 0 0 0 0 0 0
Other current liabs 4,632 5,164 4,671 5,118 5,699 6,347 7,069
Current liabilities 15,585 18,465 17,771 19,221 21,802 24,676 28,031
Long-term debt/leases/other 9,615 8,052 9,749 9,375 7,375 2,375 0
Convertible bonds 0 0 0 0 0 0 0
Provisions/other LT liabs 749 882 1,080 1,091 1,091 1,091 1,091
Total liabilities 25,949 27,400 28,601 29,686 30,267 28,141 29,121
Share capital 1,757 1,759 1,762 1,762 1,762 1,762 1,762
Retained earnings 31,458 39,947 46,712 55,304 54,017 64,123 76,539
Reserves/others 0 0 0 0 0 - 0
Shareholder funds 33,215 41,706 48,474 57,065 55,778 65,884 78,301
Minorities/other equity 182 217 248 265 303 347 398
Total equity 33,396 41,923 48,722 57,331 56,081 66,232 78,699
Total liabs & equity 59,345 69,323 77,322 87,016 86,348 94,373 107,820
Total debt 9,615 8,052 9,749 9,375 7,375 2,375 0
Net debt (12,249) (20,447) (25,700) (31,738) (29,391) (39,075) (50,080)
Adjusted EV 793,312 786,397 782,303 776,289 777,089 768,949 757,995
BVPS (Rs) 18.9 23.7 27.5 32.4 31.7 37.4 44.5
Balance sheet ratios

Key ratios
Current ratio (x) 2.5 2.6 3.0 3.2 2.7 2.7 2.8
Growth in total assets (% YoY) 11.7 16.8 11.5 12.5 (0.8) 9.3 14.2
Growth in capital employed (% YoY) 0.8 (1.0) 7.4 6.9 2.7 (0.7) 3.9
Net debt to operating cashflow (x) - - - - - - -
Gross debt to operating cashflow (x) 0.9 0.7 0.7 0.8 0.5 0.1 -
Gross debt to Ebitda (x) 0.7 0.5 0.6 0.6 0.4 0.1 -
Net debt/Ebitda (x) - - - - - - -
Gearing
Net debt/equity (%) (36.7) (48.8) (52.7) (55.4) (52.4) (59.0) (63.6)
Gross debt/equity (%) 28.8 19.2 20.0 16.4 13.1 3.6 0.0
Interest cover (x) 29.4 28.2 25.3 27.4 29.7 43.3 89.6
Debt Cover (x) 1.1 1.5 1.4 1.3 1.9 6.8 0.0
Working capital analysis
Inventory days 95.2 100.4 107.1 112.9 112.8 113.0 112.2
Debtor days 32.4 35.7 35.0 32.1 31.3 31.3 31.3
Creditor days 107.2 117.7 128.3 130.0 126.6 126.8 125.9
Working capital/Sales (%) 1.6 0.8 (0.3) 0.5 0.7 0.8 1.0
Capital employed analysis
Sales/Capital employed (%) 443.2 445.1 406.6 385.9 429.1 492.0 541.8
EV/Capital employed (%) 4,503.8 4,509.8 4,177.9 3,880.0 3,782.0 3,769.6 3,577.9
Working capital/Capital employed (%) 7.1 3.4 (1.1) 2.0 2.9 4.1 5.4
Fixed capital/Capital employed (%) 73.8 78.1 84.9 82.9 82.3 81.1 80.4
Other ratios (%)
EV/OCF (x) 76.5 64.1 59.0 65.9 54.4 47.5 41.2
EV/FCF (x) 102.2 76.2 81.8 81.9 63.7 52.4 47.7
EV/Sales (x) 10.2 10.1 10.3 10.1 8.8 7.7 6.6
Capex/depreciation (%) 226.8 146.4 259.4 142.0 119.4 80.1 123.7

Cashflow (Rsm)
Operating profit 11,806 13,670 13,661 14,553 17,067 19,498 22,405
Operating adjustments - - - - - - -
Depreciation/amortisation 1,150 1,332 1,429 1,622 1,747 1,872 2,022
Working capital changes (371) 128 1,285 (1,048) (783) (871) (1,030)
Interest paid / other financial expenses - - - - - - -
Tax paid (2,212) (2,866) (3,105) (3,343) (3,746) (4,323) (5,004)
Other non-cash operating items 0 0 0 0 0 0 0
Net operating cashflow 10,373 12,265 13,269 11,783 14,286 16,175 18,393
Capital expenditure (2,608) (1,949) (3,706) (2,303) (2,085) (1,500) (2,500)
Free cashflow 7,765 10,316 9,563 9,480 12,201 14,675 15,893
Acq/inv/disposals 1,789 2,353 2,984 3,052 2,915 3,352 3,771
Int, invt & associate div (401) (485) (540) (531) (575) (450) (250)
Net investing cashflow (1,221) (81) (1,262) 218 255 1,402 1,021
Increase in loans - - - - - - -
Dividends (4,154) (4,222) (4,770) (4,770) (16,910) (7,927) (8,455)
Net equity raised/(buybacks) 908 (1,326) (286) (1,568) (1,977) (4,967) (2,328)
Net financing cashflow (3,247) (5,548) (5,056) (6,338) (18,888) (12,894) (10,783)
Incr/(decr) in net cash 5,906 6,635 6,950 5,663 (4,347) 4,683 8,631
Exch rate movements 0 0 0 0 0 0 0
Opening cash 15,959 21,864 28,500 35,450 41,112 36,765 41,449
Closing cash 21,864 28,500 35,450 41,112 36,765 41,449 50,080
OCF PS (Rs) 5.9 7.0 7.5 6.7 8.1 9.2 10.4
FCF PS (Rs) 4.4 5.9 5.4 5.4 6.9 8.3 9.0
Cashflow ratio analysis

Growth (%)
Op cashflow growth (% YoY) 8.0 18.2 8.2 (11.2) 21.2 13.2 13.7
FCF growth (% YoY) 4.0 32.8 (7.3) (0.9) 28.7 20.3 8.3
Capex growth (%) 21.9 (25.3) 90.1 (37.9) (9.5) (28.1) 66.7
Capex/sales (%) 3.3 2.5 4.9 3.0 2.4 1.5 2.2
Capex/op cashflow (%) 25.1 15.9 27.9 19.5 14.6 9.3 13.6
Operating cashflow payout ratio (%) 33.9 32.3 29.9 112.1 43.2 43.6 43.1
Cashflow payout ratio (%) 40.0 34.4 36.0 40.5 118.4 49.0 46.0
Free cashflow payout ratio (%) 53.5 40.9 49.9 50.3 138.6 54.0 53.2
DuPont analysis
Ebit margin (%) 15.1 17.6 17.9 18.8 19.4 19.4 19.5
Asset turnover (x) 1.4 1.2 1.0 0.9 1.0 1.1 1.1
Interest burden (x) 1.1 1.1 1.2 1.2 1.1 1.1 1.2
Tax burden (x) 0.8 0.8 0.8 0.8 0.8 0.8 0.8
Return on assets (%) 17.0 17.1 14.8 14.2 15.9 17.4 17.9
Leverage (x) 1.9 1.7 1.6 1.5 1.5 1.5 1.4
ROE (%) 35.5 33.3 28.2 25.9 27.6 29.6 28.9
EVA® analysis
Ebit adj for tax 9,558 11,032 10,859 11,694 13,773 15,735 18,081
Average invested capital 21,308 22,127 23,230 25,392 27,232 28,014 28,978
ROIC (%) 44.9 49.9 46.7 46.1 50.6 56.2 62.4
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) 7.7 7.7 7.6 7.6 7.7 7.7 7.7
Weighted average cost of capital (%) 13.9 13.9 13.9 13.9 13.9 13.9 13.9
EVA/IC (%) 31.0 36.0 32.9 32.2 36.7 42.3 48.5
EVA (Rsm) 6,600 7,961 7,637 8,171 9,993 11,847 14,059

Godrej Prop
Rs708.15 - BUY
Abhinav Sinha Set to scale

abhi.sinha@clsa.com Successful national-development model; top sector pick
+91 22 6650 5069
After adopting its parent company’s management style and consumer-first
philosophy, Godrej Properties has emerged as India’s sole nationwide property
developer. Presales reached new highs in FY18 as it embarked on new project
additions in anticipation of upcoming demand growth and market gains. We
believe the company’s impressive corporate governance, professional
management and track record of on-time completions should help it sustain its
pack-leading status.
23 August 2018 Strong nationwide presence, leveraging on group resources

Backed by the solid reputation of Godrej Group, its parent, India’s largest listed
India developer by sales has emerged as the only nationwide residential-property brand
Property after selling more than 1msf across each of the four major cities - Mumbai, Delhi,
Pune and Bengaluru - in FY18. The company’s sound management makes it
Reuters GODR.BO unique among developers. It has a 150msf landbank well spread across major
Bloomberg GPL IB cities and access to a large land parcel in its home market of Mumbai.
Priced on 21 August 2018
Excellent project-addition model
Godrej has emerged as a pioneer in the use of joint ventures (JVs) to develop its
12M hi/lo Rs880.95/509.30 nationwide project additions, utilising smaller partners that receive a share of the
profits or revenues. It added 42msf of new projects over FY17-18, while at the
12M price target Rs1,097.00
±% potential +55%
same time reducing net debt, highlighting a low capital-intensity model.
Shares in issue 216.5m Volumes set to grow sharply

Free float (est.) 29.3% Godrej has adopted its parent firm’s consumer-oriented mindset, suggesting
products and prices are designed to enable quick disposals. Sales were up by
153% YoY in FY18, even as nationwide figures were down YoY, while at the same
3M ADV US$1.9m time quickly adapting to regulatory changes brought about by Rera and GST.

Top pick in residential property space
Major shareholders Out of Godrej’s 24msf of project additions in FY18, 83% were due to developer
Godrej Industries & Family 70.7% exits, suggesting that consolidation will accelerate in favour of large, listed
FIIs 14.5% developers; Rs10bn of equity raised in 1QFY19 should further aid near-term
project accretions. Our SOTP-based target price of Rs1,097 assumes normalised
earnings up to June 20CL presales, and separately includes the value of the
group’s land. Godrej is our top residential property pick.
Stock performance (%)

1M 3M 12M
Absolute 7.7 (5.0) 39.0 Financials
Relative 2.4 (13.6) 17.2 Year to 31 March 17A 18A 19CL 20CL 21CL
Abs (US$) 6.0 (7.4) 27.6 Revenue (Rsm) 15,829 15,883 22,286 16,042 15,950
(Rs) Godrej Prop (LHS) (%)
950
Rel to Nifty
220 Ebitda (Rsm) 2,527 (1,790) 1,036 4,401 3,715
850 200 Net profit (Rsm) 2,068 869 1,190 3,567 4,242
750 180 EPS (Rs) 9.6 4.0 5.2 15.6 18.5
CL/consensus (13) (EPS%) - - 38 78 85
650 160
EPS growth (% YoY) 20.4 (58.0) 30.6 196.7 18.9
550 140
PE (x) 74.1 176.2 134.9 45.5 38.2
450 120 Dividend yield (%) 0.0 0.0 0.0 0.0 0.1
350 100 PB (x) 7.6 10.2 6.1 5.5 4.8
250 80 ROE (%) 11.0 5.0 5.8 12.8 13.4
Aug 16 Apr 17 Dec 17 Aug 18 Net debt/equity (%) 174.6 190.2 89.5 82.4 54.0
Godrej Prop - BUY India strategy
Profit & Loss (Rsm)

Revenue 15,829 15,883 22,286 40.3 16,042 15,950
Cogs (ex-D&A) (10,809) (13,455) (17,496) (7,511) (7,818)
Op Ebitda 2,527 (1,790) 1,036 4,401 3,715
Depreciation/amortisation (145) (161) (176) (187) (198)
Op Ebit 2,382 (1,951) 859 4,214 3,516
Net interest inc/(exp) (1,038) (1,501) (2,117) (2,261) (2,412)
Other non-Op items 1,185 4,986 2,500 (49.9) 2,500 2,500
Profit before tax 2,528 1,534 1,242 (19) 4,453 3,604
Taxation (777) (300) (373) (1,336) (1,081)
Profit after tax 1,751 1,235 870 (29.6) 3,117 2,523
Minority interest 317 (366) 320 450 1,719
Net profit 2,068 869 1,190 36.9 3,567 4,242
Adjusted profit 2,068 869 1,190 36.9 3,567 4,242
Operating profit 2,382 (1,951) 859 4,214 3,516
Depreciation/amortisation 145 161 176 9.4 187 198
Working capital changes (7,527) 17,587 (5,346) (4,778) 2,187
Other items (2,155) (13,280) (3,066) (3,147) (1,774)
Net operating cashflow (7,155) 2,518 (7,376) (3,523) 4,127
Capital expenditure (79) (977) (64) (66) (68)
Free cashflow (7,235) 1,541 (7,441) (3,589) 4,060
M&A/Others 1,185 4,986 2,500 (49.9) 2,500 2,500
Net investing cashflow 1,105 4,010 2,436 (39.3) 2,434 2,432
Increase in loans 6,103 (2,536) (2,229) 5,000 -
Dividends 0 0 0 0 (268)
Net equity raised/other 0 0 10,000 0 0
Net financing cashflow 6,103 (2,536) 7,771 5,000 (268)
Incr/(decr) in net cash 53 3,991 2,831 (29.1) 3,911 6,292
Exch rate movements - - - - -
Cash & equivalents 4,775 8,765 11,596 32.3 15,507 21,798
Fixed assets 1,021 1,841 1,729 (6.1) 1,607 1,477
Investments 3,938 9,102 10,000 9.9 10,000 10,000
Intangible assets 0 0 0 0 0 0
Other non-current assets 0 0 - - -
Total assets 71,799 84,509 90,098 6.6 97,912 110,599
Accounts payable 11,928 32,170 28,730 (10.7) 28,099 36,540
Other current liabs 69 148 216 45.7 93 364
Long-term debt/CBs 39,765 37,229 35,000 (6) 40,000 40,000
Provisions/other LT liabs 0 0 - 0 0
Shareholder funds 20,037 14,962 26,153 74.8 29,720 33,694
Minorities/other equity 0 0 0 0 0
Total liabs & equity 71,799 84,509 90,098 6.6 97,912 110,599
Revenue growth (% YoY) (25.4) 0.3 40.3 (28.0) (0.6)
Ebitda margin (%) 16.0 (11.3) 4.6 27.4 23.3
Ebit margin (%) 15.0 (12.3) 3.9 26.3 22.0
Net profit growth (%) 30.4 (58.0) 36.9 199.9 18.9
Op cashflow growth (% YoY) nm nm (393.0) nm nm
Capex/sales (%) 0.5 6.2 0.3 0.4 0.4
Net debt/equity (%) 174.6 190.2 89.5 82.4 54.0
Net debt/Ebitda (x) 13.8 (15.9) 22.6 5.6 4.9
ROE (%) 11.0 5.0 5.8 12.8 13.4
ROIC (%) 3.5 (3.7) 1.6 7.0 5.7
84 abhi.sinha@clsa.com 23 August 2018

Valuation details
We value Godrej Properties using a SOTP-based approach wherein we value its
normalised earnings on Jun-20CL pre-sales at 40x PAT (as it is likely to sustain
high multiples, given low-cycle earnings and affordable-housing upside) and add
the value of the development potential for its Vikhroli (Mumbai) land parcel, ie,
Rs218 per share, assuming 1msf steady-state sales per annum, as recently
demonstrated by the success of its Trees project).
Investment risks
Godrej is a nationwide residential-property developer with a relatively heavy
exposure to Mumbai (comprising 50% of pre-sales). Key risks to the company's
business are therefore macro variables (eg, interest rates and discretionary
demand) that impact residential real-estate demand. Its Mumbai exposure also
implies that it needs to carefully assess the city's property demand. Also, given
Mumbai’s volatile regulatory environment, approval delays for projects are an
important risk element.
Recommendation history of Godrej Properties Ltd (GPL IB)

1,200 Abhinav Sinha BUY O-PF
Stock price (Rs)
No coverage N-R
1,000
800
600
400

07 May 2018 BUY 1,097.00 05 Feb 2017 BUY 447.00
03 Feb 2018 BUY 1,058.00 10 Nov 2016 BUY 421.00
26 Jan 2018 BUY 1,078.00 11 Aug 2016 BUY 438.00
04 Nov 2017 BUY 873.00 06 May 2016 BUY 387.00
03 Aug 2017 BUY 636.00 03 Feb 2016 BUY 376.00
05 May 2017 BUY 639.00 06 Nov 2015 BUY 391.00
28 Apr 2017 BUY 561.00 01 Oct 2015 BUY 396.00
Source: CLSA
23 August 2018 abhi.sinha@clsa.com 85

Detailed financials
Profit & Loss (Rsm)
Revenue 18,431 21,226 15,829 15,883 22,286 16,042 15,950
Cogs (ex-D&A) (14,864) (17,342) (10,809) (13,455) (17,496) (7,511) (7,818)
Research & development costs - - - - - - -
Selling & marketing expenses - - - - - - -
Other SG&A (608) (2,068) (1,565) (2,833) (2,266) (2,493) (2,618)
Other Op Expenses ex-D&A (386) (450) (928) (1,384) (1,488) (1,637) (1,800)
Op Ebitda 2,572 1,366 2,527 (1,790) 1,036 4,401 3,715
Depreciation/amortisation (100) (142) (145) (161) (176) (187) (198)
Op Ebit 2,472 1,225 2,382 (1,951) 859 4,214 3,516
Interest expense (47) (406) (1,038) (1,501) (2,117) (2,261) (2,412)
Net interest inc/(exp) (47) (406) (1,038) (1,501) (2,117) (2,261) (2,412)
Associates/investments 835 1,295 1,185 4,986 2,500 2,500 2,500
Taxation (904) (679) (777) (300) (373) (1,336) (1,081)
Profit after tax 2,356 1,434 1,751 1,235 870 3,117 2,523
Preference dividends - - - - - - -
Profit for period 2,356 1,434 1,751 1,235 870 3,117 2,523
Minority interest (447) 151 317 (366) 320 450 1,719
Net profit 1,909 1,586 2,068 869 1,190 3,567 4,242
Extraordinaries/others 0 0 0 0 0 0 0
Profit avail to ordinary shares 1,909 1,586 2,068 869 1,190 3,567 4,242
Dividends (466) 0 0 0 0 0 (268)
Retained profit 1,443 1,586 2,068 869 1,190 3,567 3,974
Adjusted profit 1,909 1,586 2,068 869 1,190 3,567 4,242
EPS (Rs) 9.6 7.9 9.6 4.0 5.2 15.6 18.5
Core EPS (Rs) 9.6 7.9 9.6 4.0 5.2 15.6 18.5
DPS (Rs) 2.0 0.0 0.0 0.0 0.0 0.0 1.0

Growth (%)
Revenue growth (% YoY) 48.9 15.2 (25.4) 0.3 40.3 (28.0) (0.6)
Ebitda growth (% YoY) (24.7) (46.9) 84.9 (170.8) nm 324.9 (15.6)
Ebit growth (% YoY) (26.4) (50.5) 94.5 (181.9) nm 390.3 (16.6)
Net profit growth (%) 19.7 (16.9) 30.4 (58.0) 36.9 199.9 18.9
EPS growth (% YoY) 11.1 (17.1) 20.4 (58.0) 30.6 196.7 18.9
Adj EPS growth (% YoY) 11.1 (17.1) 20.4 (58.0) 30.6 196.7 18.9
DPS growth (% YoY) (7.2) (100.0) - - - - -
Core EPS growth (% YoY) 11.1 (17.1) 20.4 (58.0) 30.6 196.7 18.9
Margins (%)
Ebitda margin (%) 14.0 6.4 16.0 (11.3) 4.6 27.4 23.3
Ebit margin (%) 13.4 5.8 15.0 (12.3) 3.9 26.3 22.0
Op cashflow margin (60.2) (12.1) (45.2) 15.9 (33.1) (22.0) 25.9
Returns (%)
ROE (%) 10.5 8.8 11.0 5.0 5.8 12.8 13.4
ROA (%) 2.6 1.2 2.4 (2.0) 0.7 3.1 2.4
ROIC (%) 4.2 1.8 3.5 (3.7) 1.6 7.0 5.7
ROCE (%) 5.8 2.6 4.7 (4.0) 1.8 8.1 6.6
Ebitda/net int exp (x) 54.4 3.4 2.4 (1.2) 0.5 1.9 1.5
Exceptional or extraord. inc/PBT (%) - - - - - - -
Dividend payout (%) 20.9 0.0 0.0 0.0 0.0 0.0 5.4

Balance sheet (Rsm)

Inventories 47,271 39,231 39,661 40,513 28,854 30,277 33,623
Other current assets 10,507 16,067 20,186 23,045 36,088 39,202 42,390
Current assets 71,733 61,738 66,841 73,566 78,369 86,304 99,122
Fixed assets 1,156 1,072 1,021 1,841 1,729 1,607 1,477
Investments - 2,974 3,938 9,102 10,000 10,000 10,000
Goodwill 742 0 0 0 0 0 0
Other non-current assets - 0 0 0 - - -
Total assets 73,630 65,784 71,799 84,509 90,098 97,912 110,599
Other current liabs 646 56 69 148 216 93 364
Long-term debt/leases/other 34,865 33,662 39,765 37,229 35,000 40,000 40,000
Convertible bonds - - - - - - -
Provisions/other LT liabs - 0 0 0 - 0 0
Share capital 997 1,081 1,082 1,082 1,146 1,146 1,146
Reserves/others 0 0 - 0 - 0 0
Minorities/other equity 2,279 0 0 0 0 0 0
Total equity 20,748 17,648 20,037 14,962 26,153 29,720 33,694
Total debt 34,865 33,662 39,765 37,229 35,000 40,000 40,000
Net debt 27,911 28,940 34,990 28,463 23,404 24,493 18,202
Adjusted EV 170,552 167,378 184,197 171,791 173,201 176,033 169,773
BVPS (Rs) 92.7 88.4 92.7 69.2 115.4 129.8 147.1

Key ratios
Current ratio (x) 4.0 4.3 5.6 2.3 2.7 3.1 2.7
Growth in total assets (% YoY) 19.8 (10.7) 9.1 17.7 6.6 8.7 13.0
Growth in capital employed (% YoY) 31.6 (4.3) 18.1 (21.1) 14.1 9.4 (4.3)
Net debt to operating cashflow (x) (2.5) (11.3) (4.9) 11.3 (3.2) (7.0) 4.4
Gross debt to operating cashflow (x) (3.1) (13.1) (5.6) 14.8 (4.7) (11.4) 9.7
Gross debt to Ebitda (x) 13.6 24.6 15.7 (20.8) 33.8 9.1 10.8
Net debt/Ebitda (x) 10.9 21.2 13.8 (15.9) 22.6 5.6 4.9
Gearing
Net debt/equity (%) 134.5 164.0 174.6 190.2 89.5 82.4 54.0
Interest cover (x) 52.3 3.0 2.3 (1.3) 0.4 1.9 1.5
Debt Cover (x) (0.3) (0.1) (0.2) 0.1 (0.2) (0.1) 0.1
Inventory days 1,038.0 910.3 1,332.0 1,087.4 723.6 1,436.7 1,491.7
Debtor days 113.2 75.0 45.4 39.8 25.2 35.8 30.1
Creditor days 400.0 334.6 444.8 598.1 635.2 1,380.8 1,509.0
Working capital/Sales (%) 253.7 200.4 316.3 204.5 169.7 265.6 253.4
EV/Capital employed (%) 350.5 359.3 334.7 395.6 349.5 324.7 327.1
Working capital/Capital employed (%) 96.1 91.3 91.0 74.8 76.3 78.6 77.9
Other ratios (%)
EV/OCF (x) (15.4) (65.2) (25.7) 68.2 (23.5) (50.0) 41.1
EV/FCF (x) (15.1) (72.0) (25.5) 111.5 (23.3) (49.0) 41.8
EV/Sales (x) 9.3 7.9 11.6 10.8 7.8 11.0 10.6
23 August 2018 abhi.sinha@clsa.com 87

Cashflow (Rsm)
Operating profit 2,472 1,225 2,382 (1,951) 859 4,214 3,516
Depreciation/amortisation 100 142 145 161 176 187 198
Working capital changes (11,051) 4,219 (7,527) 17,587 (5,346) (4,778) 2,187
Interest paid / other financial expenses (47) (406) (1,038) (1,501) (2,117) (2,261) (2,412)
Tax paid (904) (679) (777) (300) (373) (1,336) (1,081)
Other non-cash operating items (1,663) (7,067) (340) (11,479) (576) 450 1,719
Net operating cashflow (11,094) (2,567) (7,155) 2,518 (7,376) (3,523) 4,127
Capital expenditure (185) 243 (79) (977) (64) (66) (68)
Free cashflow (11,279) (2,324) (7,235) 1,541 (7,441) (3,589) 4,060
Acq/inv/disposals - - - - - - -
Int, invt & associate div 835 1,295 1,185 4,986 2,500 2,500 2,500
Net investing cashflow 650 1,538 1,105 4,010 2,436 2,434 2,432
Increase in loans 9,155 (1,203) 6,103 (2,536) (2,229) 5,000 -
Dividends (466) 0 0 0 0 0 (268)
Net equity raised/(buybacks) - 0 0 0 10,000 0 0
Net financing cashflow 8,689 (1,203) 6,103 (2,536) 7,771 5,000 (268)
Incr/(decr) in net cash (1,755) (2,232) 53 3,991 2,831 3,911 6,292
Exch rate movements - - - - - - -
Opening cash 8,710 6,954 4,722 4,775 8,765 11,596 15,507
Closing cash 6,955 4,722 4,775 8,766 11,596 15,507 21,798
OCF PS (Rs) (55.7) (12.9) (33.1) 11.6 (32.6) (15.4) 18.0
FCF PS (Rs) (56.6) (11.6) (33.5) 7.1 (32.8) (15.7) 17.7

Growth (%)
Op cashflow growth (% YoY) nm nm nm nm (393.0) nm nm
FCF growth (% YoY) - - - - (582.9) - -
Capex growth (%) (69.0) (231.7) - 1,130.4 (93.4) 2.8 2.6
Capex/sales (%) 1.0 1.1 0.5 6.2 0.3 0.4 0.4
Capex/op cashflow (%) (1.7) (9.5) (1.1) 38.8 (0.9) (1.9) 1.6
Operating cashflow payout ratio (%) - - - 0.0 - - 5.5
Cashflow payout ratio (%) - - - 0.0 - - 6.5
Free cashflow payout ratio (%) - - - 0.0 - - 6.6
DuPont analysis
Ebit margin (%) 13.4 5.8 15.0 (12.3) 3.9 26.3 22.0
Asset turnover (x) 0.3 0.3 0.2 0.2 0.3 0.2 0.2
Interest burden (x) 1.3 1.7 1.1 (0.8) 1.4 1.1 1.0
Tax burden (x) 0.7 0.7 0.7 0.8 0.7 0.7 0.7
Return on assets (%) 2.6 1.2 2.4 (2.0) 0.7 3.1 2.4
Leverage (x) 3.3 3.6 3.7 4.5 4.2 3.4 3.3
ROE (%) 11.6 7.5 9.3 7.1 4.2 11.2 8.0
EVA® analysis
Ebit adj for tax 1,787 831 1,650 (1,570) 602 2,950 2,461
ROIC (%) 4.2 1.8 3.5 (3.7) 1.6 7.0 5.7
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
EVA/IC (%) (10.3) (12.7) (11.0) (18.2) (12.9) (7.5) (8.8)
EVA (Rsm) (4,421) (5,859) (5,216) (7,762) (4,755) (3,124) (3,782)

HDFC
Rs1,912.70 - BUY
Aashish Agarwal Attractive risk-reward

aashish.agarwal@clsa.com Healthy core and attractive valuations can drive rerating
+91 22 6650 5075
A leading mortgage financier, HDFC is well positioned to benefit from a broad-
Prakhar Sharma based pick-up in mortgage demand in affordable and mid-income housing loans.
+91 22 6650 5058 Credit quality should stay stable, and while funding costs raise some concerns
over spreads, recent hikes in lending rates can help manage this. These factors
can drive a 15% operating profit Cagr over FY18-21CL and c.17% ROE by FY20-
21CL. Attractive valuations at 2.2x Mar-19CL adjusted PB offer favourable risk
reward. A top sector pick, we maintain our BUY rating and Rs2,480 target.
23 August 2018 Well positioned to benefit from mortgage-demand uptick; de-risking portfolio
HDFC is a leading mortgage financier with a market share of around 15%. It can
India leverage greater reach and ability to offer competitive rates and benefit from a
Financial services broad-based uptick in mortgage demand. It is expanding presence in affordable
housing segments, which could drive the next leg of growth. Affordable-housing
Reuters HDFC.BO approvals grew by c.40% YoY in FY18 (19% of total approvals) with even the mid-
Bloomberg HDFC IB high segment rising by 23%. Healthy AUM growth has come alongside a portfolio
de-risking - over the past four years, retail AUMs have seen a 17% Cagr versus
14% for total corporate loans. Corporate loans’ mix has moved towards a higher
share of LRD loans as the share of riskier non-developer loans has declined.
12M hi/lo Rs2,044.45/1,648.95
Spreads to stay stable despite rise in funding costs
±% potential +30%
Increased funding costs raise some concerns but HDFC should be able to defend
its spreads, due to a hike in lending rates and alternative available sources of
Shares in issue 1,690.3m money (such as international funding and deposits). It maintained a stable asset
Free float (est.) 100.0% quality, with low gross NPLs (1.2% of loans as of June 2018). Even though, ‘Stage
3’ (stressed) loans under are at 3.7% of loans (vs gross NPLs at 1.2%), we
understand that it is not a lead-indicator of future stress and may be subjective.
3M ADV US$72.3m
Maintain BUY
We see a 15% Cagr in core operating profits over FY18-21CL (vs 11% in FY15-
Major shareholders 18), aided by a healthy topline and stable credit costs, driving an expansion of
FIIs 72.9% core ROE towards 17%. Valuations at 2.2x Mar-19CL adjusted PB are attractive
Ins and MF 13.3% and at a discount to select peers, offering favourable risk reward. HDFC remains
among our top sector picks with a target price of Rs2,480, which includes the
value of the core lending franchise at 3x Jun-20CL adjusted PB.

1M 3M 12M
Absolute (3.2) 5.1 10.0
Relative (7.9) (4.5) (7.3) Financials
Abs (US$) (4.7) 2.3 1.0 Year to 31 March 17A 18A 19CL 20CL 21CL
(Rs) (%)
2,100 HDFC (LHS) 120 Operating profit (Rsm) 114,266 172,937 138,936 158,325 185,761
2,000 Rel to Nifty
115 Net profit (Rsm) 74,426 121,637 100,964 115,431 135,273
1,900
1,800
EPS (Rs) 47 75 60 68 80
110
1,700 CL/consensus (29) (EPS%) - - 103 102 107
1,600 105 EPS growth (% YoY) 4 59 (20) 14 17
1,500 Core ROA (%) 1.7 1.6 2.0 1.9 1.9
100
1,400
Core ROE (%) 18 20 16 17 17
1,300
95 PE (x) 21 11 11 9 6
1,200
1,100 90 Adjusted PB (x)* 5.3 2.7 2.2 1.7 1.3
Aug 16 Apr 17 Dec 17 Aug 18 Dividend yield (%) 0.9 1.0 1.2 1.3 1.5
Source: Bloomberg *Adjusted for 100% NPL coverage and investment in subs. Source: www.clsa.com
HDFC - BUY India strategy
Summary income statement

Year to 31 March (Rsm) FY17 FY18 FY19CL FY20CL FY21CL
Interest income 308,555 335,833 409,373 486,358 579,040
Interest expense 208,962 222,350 276,072 335,844 402,515
We expect a 16% Cagr over Net interest income 99,593 113,483 133,301 150,514 176,526
FY18-21CL
Other income 23,041 69,032 20,315 24,477 28,172
- Fee income 3,462 1,448 1,330 1,435 1,526
- Profit on investments 10,017 56,347 5,500 6,600 6,600
Total income 122,634 182,515 153,616 174,991 204,698
Operating expenses 8,368 9,578 14,681 16,666 18,937
Pre-provision profit 114,266 172,937 138,936 158,325 185,761
Provisions 7,000 20,300 900 1,098 1,340
PBT 107,266 152,637 138,036 157,227 184,421
Tax 32,840 31,000 37,071 41,796 49,149
Profits growth slows on a Net profit (before 74,426 121,637 100,964 115,431 135,273
high base; to include gains exceptional items)
from stake sales
Add: OCI/exceptional - - (292) - -
Comprehensive income 74,426 121,637 100,673 115,431 135,273

Source: Company, CLSA
Summary balance sheet

As at 31 March (Rsm) FY17 FY18 FY19CL FY20CL FY21CL
Loans to see 17% Cagr over Loans 2,964,720 3,594,420 4,160,437 4,876,286 5,783,686
FY18-21CL
Investments 204,101 305,325 324,435 337,946 352,470
Current assets 134,669 96,888 106,577 117,235 128,958
Cash 63,188 13,714 40,564 53,547 69,682
Net fixed assets 6,382 6,397 6,939 8,462 10,265
Total assets 3,373,060 4,016,744 4,638,952 5,393,475 6,345,061
Share capital 3,177 3,352 3,381 3,381 3,381
Reserves & surplus 393,277 610,674 691,684 761,919 845,217
Shareholders' funds 396,454 614,025 695,065 765,300 848,598
Deposits 865,740 922,430 1,153,038 1,360,584 1,605,489
Borrowings 372,700 467,670 590,393 693,140 817,906
Other loans 1,566,900 1,816,460 2,052,617 2,411,827 2,894,183
Current liabilities & prov 171,267 196,159 147,840 162,624 178,886
Total liabilities 3,373,060 4,016,744 4,638,952 5,393,475 6,345,061

90 aashish.agarwal@clsa.com 23 August 2018

Key ratios
Year to 31 March FY17 FY18 FY19CL FY20CL FY21CL
EPS (Rs) 47 75 60 68 80
EPS growth (% YoY) 4 59 (20) 14 17
PPP/share (Rs) 72 103 82 94 110
BV/share (reported) (Rs) 250 366 411 453 502
ABV/share (for invest. in subs) (Rs) 187 301 306 342 384
Core ROA (%) 1.7 1.6 2.0 1.9 1.9
Reported ROAE (%) 20 32 15 16 17
Core ROAE (%) 18 20 16 17 17
Spreads (%) 2.4 2.4 2.3 2.3 2.3
NIM (%) 3.4 3.3 3.3 3.2 3.2
Gross NPLs (% of loans) 0.8 1.1 1.2 1.2 1.2
Net NPLs (% of loans) 0.3 0.2 0.3 0.4 0.5
Coverage (% of gross NPLs; includes 61 85 78 66 56
buffer provisions)
Capital adequacy ratio (% of RWA) 14.5 19.2 15.8 15.2 14.8
- Tier I CAR (% of RWA) 11.8 17.3 14.2 14.0 13.8
Cost-income ratio (exc treasury) (%) 8 8 11 11 11
Fee income growth (% YoY) (7) (58) (8) 8 6
Fee (% total revenue) 2.8 0.8 0.9 0.8 0.7
Cost asset ratio (%) 0.3 0.3 0.3 0.3 0.3
Loan Growth (% YoY) 14 21 16 17 19
Equity/assets (%) 12 15 15 14 13
Equity/loans (%) 13 17 17 16 15
Provision/avg loans (%) 0.3 0.6 0.02 0.02 0.03
Tax rates (% of PBT) 31 20 27 27 27
Yield on loans (%) 10.4 9.6 10.0 10.2 10.3
Yield on investments (%) 9.8 7.4 7.5 7.7 7.7
Cost of funds (%) 8.0 7.2 7.7 8.0 8.1
Dividend per share (Rs) 18 20 22 26 30
Dividend payout (% of profit) 38 28 38 38 37
Dividend yield (%) 0.9 1.0 1.2 1.3 1.5
P/E (x) 41 26 32 28 24
P/E (adj for subs) (x) 21 11 11 9 6
P/PPP (x) 27 19 23 20 17
P/Book value (x) 7.7 5.2 4.7 4.2 3.8
P/Adj BV (adj for subs) (x) 5.3 2.7 2.2 1.7 1.3
Value of subs & others (Rs/sh) 924 1,109 1,247 1,324 1,415
SoTP valuations
As at 20 June 2018 Rsbn Rs/share Valuation methodology
HDFC Bank (22% stake) 1,555 920 Based on target price of Rs2,670
HDFC Life Insurance (52% stake) 620 367 Based on target price of Rs600
HDFC General Insurance (51% stake) 82 49 25x PE
Other subs 284 168
Total value of subsidiaries 2,540 1,503
Value of the mortgage financing business 1,651 977 3x adjusted PB
Value for HDFC 4,191 2,480
Target price (rounded off) 2,480
23 August 2018 aashish.agarwal@clsa.com 91

Valuation details
We value HDFC Ltd based on the sum-of-the-parts (SOTP) methodology, which
values each of its businesses (lending, stake in HDFC Bank, insurance and asset
management) separately based on their growth and profitability. We use adjusted
BVPS instead of reported BVPS as it normalises provisioning by building in 100%
coverage on NPLs and also adjusts for investments in subsidiaries that are valued
separately. Our target price includes the value of the lending business, which in
turn is based on the Gordon growth model. We believe HDFC deserves premium
valuations given its higher profitability, stronger asset quality and industry-
leading standards of corporate governance vs peers.
Investment risks
The key risk comes from a sharp rise in interest rates that can put pressure on
earnings, especially as HDFC depends primarily on wholesale sources of funding.
On the business side, slower growth in demand for mortgages and an uptick in
corporate activity can also put our earnings estimates at risk.
Recommendation history of Housing Development Finance Corp Ltd (HDFC IB)

Aashish Agarwal BUY O-PF
Stock price (Rs)
2,500 No coverage N-R
2,000
1,500

31 Jul 2018 BUY 2,480.00 31 Jan 2017 BUY 1,630.00
19 Jul 2018 BUY 2,430.00 30 Nov 2016 BUY 1,570.00
15 Jan 2018 BUY 2,200.00 28 Jul 2016 BUY 1,650.00
28 Apr 2017 BUY 1,900.00 28 Jan 2016 BUY 1,440.00
01 Apr 2017 BUY 1,800.00 02 Sep 2015 BUY 1,510.00
Source: CLSA

IndusInd Bank
Rs1,975.95 - BUY
Aashish Agarwal Scaling-up the franchise

aashish.agarwal@clsa.com Ramping-up Casa to de-risk and drive growth; M&A execution key
+91 22 6650 5075
IndusInd Bank has leveraged a strengthened deposit franchise to grow loans and
Prakhar Sharma de-risk its balance sheet. We believe a better Casa ratio and expansion into new
+91 22 6650 5058 retail segments will drive growth. Among the most acquisitive banks, its recent
purchase of Bharat Financial Inclusion has been its largest bet (a c.US$2bn
share-swap) and its scale-up will be key to profitability. A 25% earnings Cagr and
18-20% ROE over FY18-21CL, led by a topline rise and stable asset quality, will
ensure the bank remains a top sector pick, with a Rs2,350 target and BUY rating.
23 August 2018 Casa scale-up helping to grow and de-risk; new segments can boost growth
A c.15ppt rise in its Casa ratio over the past five years, to 44% as March 2018,
India reflects IndusInd Bank delivering one of the best deposit franchise scale-ups
Financial services nationwide. This has enabled a 27% loans Cagr over the same period and for the
bank to lend to better rated/lower-risk corporates. New relationships with larger
Reuters INBK.NS groups and breaking into government tie-ups are also helping; however, high
Bloomberg IIB IS unsecured-loan growth needs to be managed. We see a 30% Casa Cagr during
FY18-21CL driving a 29% loans Cagr.
Pay-off of M&A strategy will be key
12M hi/lo Rs2,023.05/1,592.40 Over the past few years, IndusInd Bank has acquired a credit-card business (from
Deutsche Bank), a settlement business (from ILFS) a jewellery-loan business (from
±% potential +19%
RBS) and microfinance institution Bharat Financial Inclusion (Bhafin). Benefits
from this last deal include 1) lower regulatory risk and funding costs for the
Shares in issue 598.1m microfinance business, 2) earnings from surplus priority loans, and 3) a boost to
Free float (est.) 85.0% capital. IndusInd Bank’s asset-risk profile may rise as microfinance carries more
risk and earnings volatility may increase.
3M ADV US$29.9m Retain BUY

IndusInd Bank’s asset quality has been strong, with a stressed-loan ratio at 1.6%
of total loans. We forecast a rising topline and stable asset quality (net NPLs
Major shareholders below 1% of loans) to drive a 25% earnings Cagr over FY18-21. Valuations are at
Promoters 15.0% a premium to the sector but justified by healthy ROE levels (18-20% over FY19-
FII 47.0% 21CL), stable asset quality and strong growth expectations. Maintain BUY with a
TP of Rs2,350, based on 4.3x Jun 20CL adjusted PB.

1M 3M 12M
Absolute 3.9 2.6 22.3
Relative (1.2) (6.7) 3.1 Financials
Abs (US$) 2.3 0.0 12.2 Year to 31 March 17A 18A 19CL 20CL 21CL
(Rs) (%)
2,200 IndusInd Bank 140 Operating profit (Rsm) 54,510 66,561 80,849 100,944 125,895
Rel to Nifty (RHS) 135
2,000 Net profit (Rsm) 28,679 36,060 44,823 56,005 69,863
130
125
EPS (Rs) 48 60 75 93 116
1,800
120 CL/consensus (34) (EPS%) - - 96 93 93
1,600 115 EPS growth (% YoY) 21 25 24 25 25
110 ROA (%) 1.8 1.8 1.8 1.7 1.7
1,400
105
ROE (%) 15 16 18 19 20
100
1,200 PE (x) 41 33 26 21 17
95
1,000 90 Adjusted PB (x)* 5.9 5.2 4.5 3.8 3.2
Aug 16 Apr 17 Dec 17 Aug 18 Dividend yield (%) 0.3 0.4 0.5 0.6 0.7
Source: Bloomberg *Adjusted for 100% NPL coverage. Source: Bank, CLSA
IndusInd Bank - BUY India strategy
Earnings to enjoy a 25% Summary income statement

Cagr over FY18-21 Year to March (Rsm) FY17 FY18 FY19CL FY20CL FY21CL
Interest income 144,057 172,807 227,169 295,692 380,363
-Interest on advances 114,791 136,999 181,589 240,013 311,993
-Income on investments 24,669 30,744 40,009 49,440 61,506
-Interest on bank balances 4,597 5,065 5,571 6,240 6,864
Interest expense 83,431 97,833 135,780 182,321 238,586
Net interest income 60,626 74,974 91,389 113,371 141,777
Other income 41,715 47,501 54,125 63,182 74,530
- Fee income 38,149 43,329 50,852 59,582 70,420
- Treasury gains 2,769 3,638 2,728 3,001 3,451
- Other income 797 534 545 599 659
Total income 102,341 122,475 145,514 176,553 216,307
Operating expenses 47,831 55,914 64,665 75,610 90,412
-Employee expenses 15,210 17,807 20,122 23,542 28,016
-Others 32,621 38,108 44,544 52,067 62,397
Pre-provision profit 54,510 66,561 80,849 100,944 125,895
Total provision 10,913 11,754 12,723 15,822 19,712
-Provision for NPL 7,048 9,009 9,308 12,471 15,452
PBT 43,597 54,807 68,126 85,122 106,183
Provision for tax 14,918 18,747 23,303 29,116 36,320
PAT 28,679 36,060 44,823 56,005 69,863
Source: Bank, CLSA
Loans to see 29% Cagr over Summary balance sheet

FY18-21CL As at March (Rsm) FY17 FY18 FY19CL FY20CL FY21CL
Cash balances 186,283 132,159 211,352 272,101 359,392
Advances 1,130,805 1,449,537 1,861,502 2,398,316 3,090,333
Investments 367,021 500,767 591,971 731,225 903,980
-G-Secs 314,523 403,660 504,575 630,719 788,398
Fixed assets 13,352 13,388 16,065 18,475 21,246
Current assets 89,023 120,412 144,494 176,283 215,065
Total assets 1,786,484 2,216,262 2,825,385 3,596,399 4,590,015
Equity capital 5,981 6,002 6,002 6,002 6,002
Reserves & surplus 200,328 232,268 271,592 320,781 382,145
Shareholders' funds 206,309 238,271 277,595 326,783 388,147
ESOP & warrants 152 146 146 146 146
Deposits 1,265,722 1,516,392 1,979,684 2,548,621 3,288,049
- Casa deposits 466,460 667,293 875,855 1,135,720 1,479,536
- Term deposits 799,262 849,099 1,103,829 1,412,901 1,808,513
Borrowings 214,537 362,891 453,613 580,625 743,200
Subordinated debt 10,000 20,000 24,000 30,000 36,000
Current liabilities 89,764 78,563 90,347 110,223 134,473
Total liabilities 1,786,484 2,216,262 2,825,385 3,596,399 4,590,015
Source: Bank, CLSA

Key ratios
Year to 31 March FY17 FY18 FY19CL FY20CL FY21CL
EPS (Rs) 48 60 75 93 116
Earnings growth (% YoY) 21 25 24 25 25
CEPS (Rs) 51 64 79 98 122
PPP / Share (Rs) 91 111 135 168 210
BV/share (Rs) 345 397 462 544 647
Adjusted BV/ Share (Rs) 334 381 443 521 620
ROAA (% avg assets) 1.8 1.8 1.8 1.7 1.7
ROAE (% avg net worth) 15 16 18 19 20
NIM 4.0 4.0 3.9 3.8 3.7
Gross NPLs (% of loans) 0.9 1.2 1.2 1.2 1.2
Net NPLs (% of loans) 0.4 0.5 0.5 0.5 0.5
Coverage (% of gross NPL) 58 56 57 60 63
Capital Adequacy Ratio (% RWA) 15.3 15.0 13.5 12.6 11.5
- Tier I CAR (% of RWA) 14.7 14.6 13.2 12.3 11.3
C/D ratio (% of deposit) 89 96 94 94 94
Cost-Income ratio (Excl Treasury) 48 47 45 44 42
Fee income growth (% YoY) 24 14 17 17 18
Fee (% avg assets) 2.4 2.2 2.0 1.9 1.7
Cost Asset Ratio (%) 2.7 2.5 2.3 2.1 2.0
Loan Growth (% YoY) 28 28 28 29 29
Equity / Assets (%) 11.5 10.8 9.8 9.1 8.5
Equity / Loans (%) 18 16 15 14 13
Provision/ Avg. loans (%) 1.0 0.8 0.7 0.7 0.7
CASA (% of deposits) 37 44 44 45 45
Tax Rates (% of PBT) 34 34 34 34 34
Yield on Advances (%) 11.4 10.6 11.0 11.3 11.4
Yield on Investments (%) 7.0 7.1 7.3 7.5 7.5
Cost of funds (%) 6.2 5.8 6.2 6.5 6.6
Dividend per Share (Rs) 6 8 9 12 15
Dividend Payout (% of profit) 13 12 12 12 12
Dividend yield (%) 0.3 0.4 0.5 0.6 0.7
P/E (x) 41 33 26 21 17
P/PPP (x) 22 18 15 12 9
P/BV (x) 5.7 5.0 4.3 3.6 3.1
P/ABV (x) 5.9 5.2 4.5 3.8 3.2

Source: Bank, CLSA
23 August 2018 aashish.agarwal@clsa.com 95

Valuation details
We value IndusInd Bank based on adjusted PB for March 20CL. We prefer to use
adjusted BVPS instead of reported BVPS, as it normalises provisioning by building
in 100% coverage on NPLs. Our Rs2,350 target is based on 4.3x June 20CL
adjusted PB. We believe IndusInd deserves a premium valuation versus peers and
its own historical average, given its higher profitability, stronger asset quality as
well as its ability to gain market share.
Investment risks
The key risks to our view come from slower-than-expected growth in the sale of
commercial vehicles and/or a sharp rise in interest rates, which can affect demand
for loans and/margins. IndusInd Bank has a relatively lower risk in corporate
exposure, as it has focused on higher-rated companies with a low focus on
infrastructure loans.
Recommendation history of IndusInd Bank Ltd (IIB IS)

Aashish Agarwal BUY O-PF
2,500 Other analysts U-PF SELL
Stock price (Rs)
No coverage N-R
2,000
1,500
1,000

11 Jul 2018 BUY 2,350.00 27 Mar 2017 BUY 1,680.00
20 Apr 2018 BUY 2,190.00 11 Jan 2017 BUY 1,450.00
12 Jan 2018 BUY 2,100.00 30 Nov 2016 BUY 1,400.00
13 Oct 2017 BUY 2,060.00 13 Oct 2016 BUY 1,500.00
05 Sep 2017 BUY 2,030.00 01 Jul 2016 BUY 1,330.00
12 Jul 2017 BUY 1,870.00 02 Sep 2015 BUY 1,130.00
Source: CLSA

Infosys
Rs1,384.30 - BUY
Ankur Rudra Only just getting started

ankur.rudra@clsa.com Improving demand outlook, better execution, reasonable valuations
+91 22 6650 5059
Infosys has outperformed IT peers and the broader markets over the past year,
since Vishal Sikka resigning as CEO caused stock correction. Despite the rally,
we believe the good times are only just starting, through a combination of
improving demand outlook, stronger differentiation in digital services and
superior execution. The fact the stock still trades at 17x FY20 and offers a
dividend yield of around 5% is the icing on the cake. Reiterate BUY.
Investing to gain share in a recovering market

23 August 2018 Demand outlook for IT services hasn’t been better for Indian techs in the past
three years as larger implementation projects prompt customers to start moving
India into the second phase of digital adoption. Infosys couldn’t have timed its
Technology investments in bulking up on sales, digital staff, localisation and pay any better.
This may enable it to capture a higher proportion of improving demand, even as
Reuters INFY.BO several peers are still overly focussed on efficiencies.
Bloomberg INFO IB
Renewed focus on execution drives up client mining and captures growth
Infosys has comprehensively overcome the distractions of a fractious relationship
between its CEO/board and founders, recovering its position with key clients,
12M hi/lo Rs1,431.35/866.65 strength in competitive showdowns compared to peers, and industry ranking in
key growth areas. The company has also been able to recapture growth on large
±% potential +13%
deals and share in expanding areas.
Shares in issue 2,285.5m Focus on digital services has streamlined efforts

Free float (est.) 84.1% Infosys has refocussed on digital-service opportunities, where it is best suited,
cutting off sub-scale-product distractions that went against its grain, to open up a
large market around industry integration. This positions it well to catch up on
3M ADV US$85.2m market share that can help both growth and margins over the next three years.

Reasonable valuations support BUY
Major shareholders Infosys trades at 18x one-year forward PE, at a discount to TCS, Accenture and
Promoters 12.8% Cognizant. It also has lower growth expectations off of a smaller base than these
Foreign Institutions 39.0% peers. Organic growth over the last year has been close to each of these
companies, despite significantly higher internal distractions, suggesting a high
surprise potential. This sets it up well to beat low expectations as self-help and
improving demand boost growth, and offers a stronger rerating potential. We
keep our BUY rating, which is supported by a progressive capital-return policy.
1M 3M 12M
Relative (2.3) 7.2 34.7 Year to 31 March 17A 18A 19CL 20CL 21CL
(Rs) (%)
1,500 Infosys (LHS) 110 Net profit (Rsm) 143,530 160,270 160,290 176,581 196,127
Rel to Nifty
1,400 105 EPS (Rs) 62.8 71.2 73.8 81.3 90.3
1,300
100 CL/consensus (46) (EPS%) - - 101 101 105
95 EPS growth (% YoY) 6.4 13.4 3.6 10.2 11.1
1,200
90 PE (x) 22.0 19.4 18.8 17.0 15.3
1,100
85 Adjusted EPS (Rs) 62.8 64.9 75.0 81.3 90.3
1,000
80 Adj EPS growth (% YoY) 6.4 3.3 15.7 8.3 11.1
900 75 Dividend yield (%) 2.0 3.1 5.6 2.8 3.1
800 70 FCF yield (%) 3.6 4.0 4.2 4.8 5.2
Aug 16 Apr 17 Dec 17 Aug 18 ROE (%) 22.0 23.9 23.9 25.7 26.8
Infosys - BUY India strategy
Profit & Loss (Rsm)

Revenue 684,850 705,220 803,226 13.9 884,576 969,490
Cogs (ex-D&A) (415,500) (432,690) (500,792) (547,953) (600,897)
Gross Profit (ex-D&A) 269,350 272,530 302,433 11 336,623 368,594
Op Ebitda 186,050 190,100 210,139 10.5 236,763 260,594
Op Ebit 169,020 171,470 192,399 12.2 218,423 241,654
Net interest inc/(exp) 30,490 31,220 26,629 (14.7) 23,469 27,013
Other non-Op items 0 0 - - -
Taxation (55,980) (42,420) (58,737) (65,311) (72,540)
Profit after tax 143,530 160,270 160,290 0 176,581 196,127
Minority interest 0 0 0 0 0
Net profit 143,530 160,270 160,290 0 176,581 196,127
Adjusted profit 143,530 145,950 162,990 11.7 176,581 196,127
Depreciation/amortisation 17,030 18,630 17,740 (4.8) 18,340 18,940
Working capital changes (19,440) (1,060) (14,627) (5,331) (4,915)
Other items (25,980) (43,979) (40,679) (51,134) (56,212)
Free cashflow 113,030 125,081 124,846 (0.2) 143,263 156,967
M&A/Others (143,140) 51,090 2,710 (94.7) 9,292 10,686
Net investing cashflow (170,740) 31,110 (27,277) (27,743) (31,813)
Increase in loans - - - - -
Dividends (69,390) (74,640) (104,735) (180,236) (104,986)
Net equity raised/other 0 (130,410) 0 0 0
Incr/(decr) in net cash (99,500) (28,879) 22,822 (27,681) 62,667
Exch rate movements (1,220) 810 (410) 0 0
Fixed assets 117,160 121,430 133,157 9.7 151,852 175,411
Investments - - - - -
Intangible assets 44,280 24,580 27,640 12.4 27,640 27,640
Other non-current assets 135,060 152,720 146,670 (4) 146,670 146,670
Total assets 833,550 798,900 859,000 7.5 866,455 971,424
Other current liabs 136,460 134,110 151,565 13 162,143 175,408
Long-term debt/CBs - - - - -
Provisions/other LT liabs 3,600 8,610 8,830 2.6 8,830 8,830
Revenue growth (% YoY) 9.7 3.0 13.9 10.1 9.6
Ebitda margin (%) 27.2 27.0 26.2 26.8 26.9
Ebit margin (%) 24.7 24.3 24.0 24.7 24.9
Op cashflow growth (% YoY) 14.9 3.2 6.7 16.4 10.6
Capex/sales (%) 4.0 2.8 3.7 4.2 4.4
Net debt/equity (%) (32.8) (30.5) (32.0) (28.1) (32.9)
ROE (%) 22.0 23.9 23.9 25.7 26.8
ROIC (%) 31.9 29.3 30.0 32.5 34.2
98 ankur.rudra@clsa.com 23 August 2018

Valuation details
Our Rs1,560 target is based on 18x one-year-forward PE, a 20% discount to the
PE multiple implied by peer Tata Consultancy’s target price. A lower multiple is
justified by slower expected growth. We have upgraded our target multiple to
18x as we expect a stronger competitive advantage and better margin
performance.
Investment risks
Key risks to our view include: rupee appreciation, which could hurt earnings,
given that Infosys benefits from a weaker local currency - we estimate every 1%
drop in the Rs/US$ helps earnings by 1-1.5%, all else being equal; weak economic
activity in the US, which is Infosys's largest export market (62% of revenue); and
risk of attrition from the changes in executive leadership.
Recommendation history of Infosys Ltd (INFO IB)

Ankur Rudra BUY O-PF
Stock price (Rs)
1,600 No coverage N-R
1,400
1,200
1,000

05 Jul 2018 BUY 1,560.00 27 Mar 2017 U-PF 1,056.65*
10 Apr 2018 BUY 1,329.50* 06 Jan 2017 U-PF 1,041.77*
13 Jan 2018 BUY 1,289.81* 09 Sep 2016 O-PF 1,091.38*
04 Jan 2018 BUY 1,220.36* 29 Aug 2016 O-PF 1,111.22*
22 Nov 2017 BUY 1,131.06* 16 Jul 2016 O-PF 1,190.59*
10 Oct 2017 BUY 1,091.38* 04 Jul 2016 O-PF 1,309.65*
27 Aug 2017 BUY 1,061.61* 17 Apr 2016 O-PF 1,339.42*
07 Jul 2017 U-PF 932.63* 13 Oct 2015 BUY 1,314.61*
14 Apr 2017 U-PF 982.24* 04 Sep 2015 BUY 1,413.83*
23 August 2018 ankur.rudra@clsa.com 99

Detailed financials
Profit & Loss (Rsm)
Revenue 533,190 624,410 684,850 705,220 803,226 884,576 969,490
Cogs (ex-D&A) (318,140) (376,400) (415,500) (432,690) (500,792) (547,953) (600,897)
Other SG&A (36,630) (42,920) (47,390) (46,850) (47,773) (52,036) (57,031)
Other Op Expenses ex-D&A - - - - - - -
Op Ebitda 149,010 170,780 186,050 190,100 210,139 236,763 260,594
Op Ebit 138,320 156,190 169,020 171,470 192,399 218,423 241,654
Interest income 34,260 31,240 30,490 31,220 26,629 23,469 27,013
Interest expense 0 0 0 0 0 0 0
Net interest inc/(exp) 34,260 31,240 30,490 31,220 26,629 23,469 27,013
Associates/investments - - - - - - -
Taxation (49,290) (52,530) (55,980) (42,420) (58,737) (65,311) (72,540)
Profit after tax 123,290 134,900 143,530 160,270 160,290 176,581 196,127
Minority interest 0 0 0 0 0 0 0
Net profit 123,290 134,900 143,530 160,270 160,290 176,581 196,127
Extraordinaries/others 0 0 0 (14,320) 2,700 0 0
Dividends (59,500) (66,511) (74,053) (117,472) (203,351) (84,727) (112,104)
Retained profit 63,790 68,389 69,477 28,478 (40,361) 91,854 84,023
Adjusted profit 123,290 134,900 143,530 145,950 162,990 176,581 196,127
EPS (Rs) 53.9 59.0 62.8 71.2 73.8 81.3 90.3
Core EPS (Rs) 53.9 59.0 62.8 64.9 75.0 81.3 90.3
DPS (Rs) 22.3 24.3 27.0 43.5 78.0 39.0 43.0

Growth (%)
Revenue growth (% YoY) 6.4 17.1 9.7 3.0 13.9 10.1 9.6
Ebit growth (% YoY) 14.9 12.9 8.2 1.4 12.2 13.5 10.6
EPS growth (% YoY) 15.8 9.4 6.4 13.4 3.6 10.2 11.1
DPS growth (% YoY) 41.3 9.0 11.3 61.1 79.3 (50.0) 10.3
Margins (%)
Ebitda margin (%) 27.9 27.4 27.2 27.0 26.2 26.8 26.9
Ebit margin (%) 25.9 25.0 24.7 24.3 24.0 24.7 24.9
Returns (%)
ROE (%) 24.1 23.2 22.0 23.9 23.9 25.7 26.8
ROA (%) 16.0 15.9 15.3 16.6 17.0 18.5 19.2
ROIC (%) 42.4 41.6 31.9 29.3 30.0 32.5 34.2
ROCE (%) 60.2 58.4 44.8 37.5 41.8 45.4 47.6
Ebitda/net int exp (x) - - - - - - -
Exceptional or extraord. inc/PBT (%) - - - 7.1 (1.2) - -
Dividend payout (%) 41.2 41.1 43.0 61.1 105.7 48.0 47.6

Balance sheet (Rsm)

Inventories - - - - - - -
Current assets 471,960 516,950 537,050 500,170 551,533 540,293 621,703
Fixed assets 91,250 105,300 117,160 121,430 133,157 151,852 175,411
Investments - - - - - - -
Goodwill 30,910 37,640 36,520 22,110 23,940 23,940 23,940
Other intangible assets 6,380 9,850 7,760 2,470 3,700 3,700 3,700
Total assets 663,520 753,890 833,550 798,900 859,000 866,455 971,424
Taxes payable 28,180 34,100 38,850 20,430 20,320 20,320 20,320
Long-term debt/leases/other - - - - - - -
Provisions/other LT liabs 2,060 3,710 3,600 8,610 8,830 8,830 8,830
Share capital 33,780 33,850 35,000 12,740 13,170 13,170 13,170
Reserves/others 4,070 7,390 4,260 24,090 28,020 28,020 28,020
Total equity 547,630 617,790 689,820 649,240 689,886 686,231 777,372
Total debt 0 0 0 0 0 0 0
Net debt (303,670) (326,970) (226,250) (198,180) (220,592) (192,911) (255,578)
Adjusted EV 2,860,286 2,836,986 2,937,706 2,917,084 2,786,878 2,814,559 2,751,892
BVPS (Rs) 239.6 270.3 301.8 288.5 317.5 315.9 357.8

Key ratios
Current ratio (x) 4.1 3.9 3.8 3.5 3.4 3.2 3.4
Growth in total assets (% YoY) 16.3 13.6 10.6 (4.2) 7.5 0.9 12.1
Growth in capital employed (% YoY) 13.0 19.2 59.4 (2.7) 4.0 5.1 5.8
Gross debt to operating cashflow (x) - - - - - - -
Gross debt to Ebitda (x) - - - - - - -
Gearing
Net debt/equity (%) (55.5) (52.9) (32.8) (30.5) (32.0) (28.1) (32.9)
Interest cover (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Debt Cover (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Inventory days - - - - - - -
Debtor days 61.8 61.5 63.0 65.9 62.9 62.0 61.2
Creditor days 1.8 2.6 3.3 4.5 5.7 6.0 5.8
EV/Capital employed (%) 1,172.4 975.5 633.7 646.7 593.8 570.5 527.4
Other ratios (%)
EV/OCF (x) 26.6 23.2 20.9 20.1 18.0 15.6 13.8
EV/FCF (x) 33.6 29.8 26.0 23.3 22.3 19.6 17.5
EV/Sales (x) 5.4 4.5 4.3 4.1 3.5 3.2 2.8
23 August 2018 ankur.rudra@clsa.com 101

Cashflow (Rsm)
Operating adjustments 34,260 31,240 30,490 31,220 26,629 23,469 27,013
Working capital changes (8,820) (21,370) (19,440) (1,060) (14,627) (5,331) (4,915)
Tax paid (67,510) (58,660) (56,570) (68,869) (58,737) (65,311) (72,540)
Other non-cash operating items 570 440 100 (6,330) (8,570) (9,292) (10,686)
Free cashflow 85,040 95,200 113,030 125,081 124,846 143,263 156,967
Acq/inv/disposals 9,690 (3,930) (143,140) 51,090 2,710 9,292 10,686
Int, invt & associate div - - - - - - -
Net investing cashflow (12,780) (31,160) (170,740) 31,110 (27,277) (27,743) (31,813)
Increase in loans - - - - - - -
Dividends (49,350) (68,130) (69,390) (74,640) (104,735) (180,236) (104,986)
Net equity raised/(buybacks) 0 0 0 (130,410) 0 0 0
Incr/(decr) in net cash 45,380 23,140 (99,500) (28,879) 22,822 (27,681) 62,667
Exch rate movements (1,210) 160 (1,220) 810 (410) 0 0
Opening cash 259,500 303,670 326,970 226,250 198,180 220,592 192,911
Closing cash 303,670 326,970 226,250 198,181 220,592 192,911 255,578
OCF PS (Rs) 47.0 53.6 61.5 64.5 71.3 83.0 91.8
FCF PS (Rs) 37.2 41.7 49.5 55.6 57.5 65.9 72.3

Growth (%)
Op cashflow growth (% YoY) (11.8) 13.9 14.9 3.2 6.7 16.4 10.6
FCF growth (% YoY) (9.9) 11.9 18.7 10.7 (0.2) 14.8 9.6
Capex growth (%) (18.1) 21.2 1.4 (27.6) 50.1 23.5 14.8
Capex/sales (%) 4.2 4.4 4.0 2.8 3.7 4.2 4.4
DuPont analysis
Ebit margin (%) 25.9 25.0 24.7 24.3 24.0 24.7 24.9
Asset turnover (x) 0.9 0.9 0.9 0.9 1.0 1.0 1.1
Tax burden (x) 0.7 0.7 0.7 0.8 0.7 0.7 0.7
Return on assets (%) 16.0 15.9 15.3 16.6 17.0 18.5 19.2
Leverage (x) 1.2 1.2 1.2 1.2 1.2 1.3 1.3
ROE (%) 24.1 23.2 22.0 23.9 23.9 25.7 26.8
EVA® analysis
Ebit adj for tax 98,815 112,415 121,595 135,584 140,803 159,449 176,407
ROIC (%) 42.4 41.6 31.9 29.3 30.0 32.5 34.2
Cost of equity (%) 19.7 19.7 19.7 19.7 19.7 19.7 19.7
EVA/IC (%) 22.8 21.9 12.3 9.6 10.4 12.9 14.5
EVA (Rsm) 53,038 59,279 46,720 44,475 48,618 63,088 74,885

ITC
Rs312.75 - BUY
Vivek Maheshwari Reward greater than risk

vivek.maheshwari@clsa.com Cigarette recovery and reasonable valuations provide an opportunity
+91 22 6650 5053
ITC has underperformed its FMCG peers, as well as broader indices in the past
Bhavesh Pravin Shah year, primarily due to tax concerns. Although valid, we believe these concerns
+91 22 6650 5009 are exaggerated as there is a surplus of compensation cess collections. Given the
modest base, cigarette volume growth is set to recover to mid-single digits and
profits to double-digit growth in FY19. With valuation of 29x one-year forward
earnings at a significant discount to peers, we see favourable risk reward with a
SOTP-based target price of Rs390. BUY.
Concerns over cigarette taxes are exaggerated
23 August 2018 Taxation remains a key concern. We recall that volumes were impacted when the
government raised taxes out of turn under GST (in July 2017). While worries
India persist, we find these exaggerated - compensation cess collections, around 80%
Consumer of tobacco taxes, are stacking up well ahead of payments due to state
governments. Also, recent amendments to distribute outstanding IGST between
Reuters ITC.BO Delhi and the states will boost the latter’s revenue, reducing the need to tap into
Bloomberg ITC IB the compensation cess fund. There may be a tax hike in September when the GST
Council meets, but ITC should be able to manage it through annual price hikes.
CNX Nifty @ 11,570.9 Cigarette volumes and Ebit growth set to recover
After witnessing a declining trend in the past several quarters, 1QFY19 cigarette
12M hi/lo Rs317.00/251.45
volumes rose by around 1% YoY. Going into FY19, we forecast volume growth to
12M price target Rs390.00 further accelerate (4% for FY19) as the base is -4.5% for the remainder of the
±% potential +25% year. Given volume recovery and a healthy margin profile, we forecast cigarette
profit growth to accelerate, from the mid-single digits of the past few years to
Shares in issue 12,207.4m double-digit growth in FY19.
Free float (est.) 70.3%
FMCG business - Gaining scale though negligible contribution to profits
Market cap US$54,730m ITC has been able to grow its FMCG topline steadily - segment now forms 25% of
3M ADV US$53.0m
net revenue from zero contribution previously. Along with an aggressive foray
into new categories, its focussed approach and distribution muscle have helped.
Foreign s'holding 17.5% ITC today is the second largest in terms of revenue, just after Hindustan Unilever,
and ahead of peers like Nestle and Dabur. FMCG, however, remains in gestation
Major shareholders with Rs23bn of cumulative loss since FY02, in addition to capex of Rs56bn.
BAT 29.7%
FPIs 17.5% Reasonable valuations; BUY
ITC trades at 29x one-year forward earnings, making it one of the cheapest
consumer names in our coverage. The stock trades at five-year average PE
multiple at a time when peers trade at a significant premium. Our SOTP-based
target price values the cigarette business at 28x Sep-20CL PE, and FMCG at 5x
Stock performance (%) Sep-20CL sales. BUY.
1M 3M 12M
Relative 8.8 0.8 (6.6) Year to 31 March 17A 18A 19CL 20CL 21CL
ITC (LHS)
350 (Rs)
Rel to Nifty
(%) 130 Ebitda (Rsm) 141,313 151,681 169,138 191,842 214,346
125 Net profit (Rsm) 102,009 109,533 121,245 137,190 153,090
330
120
310
EPS (Rs) 8.4 9.0 9.9 11.1 12.4
115
110 CL/consensus (24) (EPS%) - - 98 98 100
290
105 EPS growth (% YoY) 8.7 6.9 10.1 12.6 11.0
270 100 PE (x) 37.2 34.8 31.6 28.1 25.3
95
250 Dividend yield (%) 1.5 1.6 1.8 2.1 2.4
90
230 PB (x) 8.4 7.4 6.7 6.0 5.4
85
210 80 ROE (%) 23.5 22.6 22.3 22.5 22.6
Aug 16 Apr 17 Dec 17 Aug 18 Net cash per share (Rs) 14.8 18.1 21.1 24.5 28.5
ITC - BUY India strategy
Profit & Loss (Rsm)

Revenue 389,792 397,045 437,339 10.1 489,408 542,951
Cogs (ex-D&A) (153,136) (152,398) (165,678) (185,403) (204,330)
Gross Profit (ex-D&A) 236,656 244,646 271,661 11 304,005 338,621
Op Ebitda 141,313 151,681 169,138 11.5 191,842 214,346
Op Ebit 130,932 140,227 156,676 11.7 177,380 197,634
Net interest inc/(exp) 19,630 20,432 20,525 0.5 23,156 26,095
Other non-Op items 4,468 3,729 4,765 27.8 5,361 6,031
Taxation (53,021) (54,856) (60,721) (68,707) (76,670)
Profit after tax 102,009 109,533 121,245 10.7 137,190 153,090
Net profit 102,009 109,533 121,245 10.7 137,190 153,090
Adjusted profit 102,009 109,533 121,245 10.7 137,190 153,090
Working capital changes 4,579 13,084 (6,304) (8,146) (8,377)
Other items (45,871) (38,257) (51,123) (58,109) (64,803)
Net operating cashflow 100,020 126,509 111,711 (11.7) 125,587 141,166
Free cashflow 70,980 98,964 81,967 (17.2) 95,587 111,166
M&A/Others 22,083 2,145 20,610 861 23,186 26,085
Net investing cashflow (6,957) (25,400) (9,134) (6,814) (3,915)
Increase in loans (165) (79) - - -
Dividends (81,736) (68,803) (75,772) (85,302) (96,910)
Net equity raised/other 10,525 8,683 10,625 22.4 10,657 10,664
Incr/(decr) in net cash 21,687 40,910 37,431 (8.5) 44,128 51,004
Exch rate movements 0 0 0 0 0
Fixed assets 184,173 205,916 223,198 8.4 238,736 252,024
Investments 33,072 38,757 38,757 0 38,757 38,757
Intangible assets 0 0 0 0 0
Other non-current assets 43,946 62,035 68,330 10.1 76,466 84,831
Total assets 542,160 623,813 694,558 11.3 774,942 860,538
Long-term debt/CBs 258 180 180 0 180 180
Provisions/other LT liabs 18,717 19,179 20,079 4.7 21,079 22,079
Ebitda margin (%) 36.3 38.2 38.7 39.2 39.5
Ebit margin (%) 33.6 35.3 35.8 36.2 36.4
Op cashflow growth (% YoY) 8.6 26.5 (11.7) 12.4 12.4
Capex/sales (%) 7.5 6.9 6.8 6.1 5.5
Net debt/equity (%) (39.7) (43.0) (45.0) (47.1) (49.5)
ROE (%) 23.5 22.6 22.3 22.5 22.6
ROIC (%) 34.1 35.1 36.6 38.2 39.5

Valuation details
We use sum-of-the-parts (SOTP) methodology to value ITC due to its varied
businesses. We value the cigarettes business at 28x Sep-20CL. The FMCG -
Others business is valued at 5x EV/sales, which is at a discount to consumer
peers, as the business is still in investment mode and is generating negligible
returns. We value the Agri-business and Paperboards & packaging at 8x
EV/Ebitda, and Hotels at 12x EV/Ebitda.
Investment risks
An increase in illicit cigarettes, anti-smoking regulations, sharp GST/cess hikes
and aggressive diversification in the healthcare sector are the key risks to our
positive view.
Recommendation history of ITC Ltd (ITC IB)

Vivek Maheshwari BUY O-PF
Stock price (Rs)
No coverage N-R
400
350
300
250
200

27 Jul 2018 BUY 390.00 01 Feb 2017 BUY 325.00
17 May 2018 BUY 340.00 25 Nov 2016 BUY 300.00
04 Jan 2018 BUY 330.00 27 Oct 2016 BUY 290.00
04 Oct 2017 BUY 310.00 24 Jun 2016 BUY 283.33*
28 Jul 2017 U-PF 285.00 21 May 2016 BUY 265.18*
18 Jul 2017 SELL 285.00 01 Mar 2016 BUY 245.29*
02 Jul 2017 BUY 417.00 23 Jan 2016 SELL 192.26*
27 May 2017 BUY 375.00 16 Oct 2015 SELL 208.83*

Detailed financials
Profit & Loss (Rsm)
Revenue 360,832 364,753 389,792 397,045 437,339 489,408 542,951
Cogs (ex-D&A) (146,720) (137,047) (153,136) (152,398) (165,678) (185,403) (204,330)
Other SG&A (48,274) (52,305) (52,995) (48,700) (53,803) (58,163) (63,899)
Op Ebitda 130,494 133,525 141,313 151,681 169,138 191,842 214,346
Op Ebit 120,876 123,518 130,932 140,227 156,676 177,380 197,634
Interest income 15,431 17,693 19,859 21,298 21,250 23,906 26,895
Interest expense (574) (491) (230) (867) (725) (750) (800)
Net interest inc/(exp) 14,857 17,201 19,630 20,432 20,525 23,156 26,095
Forex/other income 4,242 3,621 4,468 3,729 4,765 5,361 6,031
Taxation (43,964) (51,057) (53,021) (54,856) (60,721) (68,707) (76,670)
Profit after tax 96,011 93,284 102,009 109,533 121,245 137,190 153,090
Net profit 96,011 93,284 102,009 109,533 121,245 137,190 153,090
Extraordinaries/others 66 0 0 2,700 0 0 0
Dividends (59,990) (59,785) (81,736) (68,803) (75,772) (85,302) (96,910)
Retained profit 36,088 33,498 20,273 43,430 45,473 51,888 56,179
Adjusted profit 96,011 93,284 102,009 109,533 121,245 137,190 153,090
EPS (Rs) 8.0 7.7 8.4 9.0 9.9 11.1 12.4
Core EPS (Rs) 8.0 7.7 8.4 9.0 9.9 11.1 12.4
DPS (Rs) 4.2 5.7 4.8 5.2 5.8 6.5 7.5

Growth (%)
Ebit growth (% YoY) 9.5 2.2 6.0 7.1 11.7 13.2 11.4
Net profit growth (%) 12.1 (2.8) 9.4 7.4 10.7 13.2 11.6
EPS growth (% YoY) 11.2 (3.2) 8.7 6.9 10.1 12.6 11.0
Adj EPS growth (% YoY) 11.2 (3.2) 8.7 6.9 10.1 12.6 11.0
DPS growth (% YoY) 4.2 36.0 (16.2) 8.4 11.7 13.0 15.4
Core EPS growth (% YoY) 11.2 (3.2) 8.7 6.9 10.1 12.6 11.0
Margins (%)
Ebitda margin (%) 36.2 36.6 36.3 38.2 38.7 39.2 39.5
Ebit margin (%) 33.5 33.9 33.6 35.3 35.8 36.2 36.4
Returns (%)
ROE (%) 30.2 23.6 23.5 22.6 22.3 22.5 22.6
ROA (%) 19.7 16.8 16.5 16.0 15.8 16.1 16.1
ROIC (%) 42.2 33.0 34.1 35.1 36.6 38.2 39.5
ROCE (%) 70.1 58.2 59.0 60.9 65.4 69.4 73.3
Ebitda/net int exp (x) - - - - - - -
Dividend payout (%) 52.2 73.3 56.6 57.4 58.2 58.4 60.7

Balance sheet (Rsm)

Inventories 78,368 85,198 78,640 72,372 79,716 89,207 98,967
Other current assets 0 0 0 0 0 0 0
Current assets 219,236 260,629 280,969 317,106 364,273 420,983 484,925
Fixed assets 160,135 164,301 184,173 205,916 223,198 238,736 252,024
Investments 28,780 31,070 33,072 38,757 38,757 38,757 38,757
Goodwill 0 0 0 0 0 0 0
Total assets 447,648 500,313 542,160 623,813 694,558 774,942 860,538
Accrued expenses 36,965 40,389 41,520 55,019 60,602 67,818 75,237
Taxes payable 506 566 784 460 507 568 630
Long-term debt/leases/other 530 423 258 180 180 180 180
Share capital 8,016 8,047 12,147 12,204 12,265 12,327 12,388
Reserves/others 0 0 - 0 0 - -
Total equity 372,878 416,564 453,410 514,001 574,666 642,188 714,585
Total debt 530 423 258 180 180 180 180
Net debt (123,114) (158,144) (179,995) (220,984) (258,415) (302,543) (353,547)
Adjusted EV 3,587,986 3,561,737 3,550,662 3,506,898 3,498,808 3,483,859 3,457,131
BVPS (Rs) 31.0 34.5 37.3 42.1 46.9 52.1 57.7

Key ratios
Current ratio (x) 3.8 4.0 4.0 3.5 3.7 3.8 3.9
Growth in total assets (% YoY) 14.1 11.8 8.4 15.1 11.3 11.6 11.0
Growth in capital employed (% YoY) 56.4 1.8 7.2 0.7 7.3 6.2 5.0
Gross debt to operating cashflow (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Gross debt to Ebitda (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Gearing
Net debt/equity (%) (33.0) (38.0) (39.7) (43.0) (45.0) (47.1) (49.5)
Interest cover (x) 237.4 287.4 657.0 186.4 245.4 268.4 280.7
Debt Cover (x) 175.6 217.8 387.1 703.2 621.0 698.1 784.7
Inventory days 189.0 217.8 195.3 180.8 167.5 166.3 168.1
Debtor days 19.7 17.1 18.2 21.0 20.7 20.5 20.6
Creditor days 48.0 54.6 57.0 71.1 78.3 77.7 78.5
Other ratios (%)
EV/OCF (x) 38.5 38.7 35.5 27.7 31.3 27.7 24.5
EV/FCF (x) 58.1 53.4 50.0 35.4 42.7 36.4 31.1
EV/Sales (x) 9.9 9.8 9.1 8.8 8.0 7.1 6.4

Cashflow (Rsm)
Working capital changes (1,489) (2,920) 4,579 13,084 (6,304) (8,146) (8,377)
Interest paid / other financial expenses 574 491 230 867 725 750 800
Tax paid (43,964) (51,057) (53,021) (54,856) (60,721) (68,707) (76,670)
Other non-cash operating items 7,474 12,080 6,920 15,733 8,874 9,848 11,066
Free cashflow 61,717 66,717 70,980 98,964 81,967 95,587 111,166
Acq/inv/disposals - - - - - - -
Int, invt & associate div 11,657 22,857 22,083 2,145 20,610 23,186 26,085
Net investing cashflow (19,715) (2,545) (6,957) (25,400) (9,134) (6,814) (3,915)
Increase in loans (135) (107) (165) (79) - - -
Dividends (55,523) (59,785) (81,736) (68,803) (75,772) (85,302) (96,910)
Net equity raised/(buybacks) 9,923 5,242 10,525 8,683 10,625 10,657 10,664
Incr/(decr) in net cash 27,638 34,923 21,687 40,910 37,431 44,128 51,004
Exch rate movements 0 0 0 0 0 0 0
Opening cash 96,006 123,644 158,567 180,254 221,164 258,595 302,723
Closing cash 123,644 158,567 180,254 221,164 258,595 302,723 353,727
OCF PS (Rs) 7.7 7.6 8.2 10.4 9.1 10.2 11.4
FCF PS (Rs) 5.1 5.5 5.8 8.1 6.7 7.8 9.0

Growth (%)
Op cashflow growth (% YoY) 33.7 (1.0) 8.6 26.5 (11.7) 12.4 12.4
FCF growth (% YoY) 43.5 8.1 6.4 39.4 (17.2) 16.6 16.3
Capex growth (%) 17.9 (19.0) 14.3 (5.2) 8.0 0.9 0.0
Capex/sales (%) 8.7 7.0 7.5 6.9 6.8 6.1 5.5
DuPont analysis
Ebit margin (%) 33.5 33.9 33.6 35.3 35.8 36.2 36.4
Asset turnover (x) 0.9 0.8 0.7 0.7 0.7 0.7 0.7
Tax burden (x) 0.7 0.6 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 19.7 16.8 16.5 16.0 15.8 16.1 16.1
Leverage (x) 1.3 1.2 1.2 1.2 1.2 1.2 1.2
ROE (%) 30.2 23.6 23.5 22.6 22.3 22.5 22.6
EVA® analysis
Ebit adj for tax 82,911 79,827 86,153 93,434 104,394 118,189 131,685
ROIC (%) 42.2 33.0 34.1 35.1 36.6 38.2 39.5
Cost of equity (%) 13.0 13.0 13.0 13.0 13.0 13.0 13.0
EVA/IC (%) 29.2 20.0 21.1 22.1 23.6 25.2 26.5
EVA (Rsm) 57,373 48,381 53,323 58,822 67,278 77,919 88,373

Mahindra
Rs957.55 - BUY
Nitij Mangal Good outlook and reasonably priced

nitij.mangal@clsa.com Benefitting from strong tractor and LCV demand; new SUV launches
+91 22 6650 5064
M&M is benefitting from ongoing strong tractor and LCV demand, which
Sagar Sahu together form 70% of its standalone Ebit. Outlook for rural demand continues to
+91 22 6650 5087 remain strong, despite a below-normal monsoon, given good rainfall distribution
and a big increase in agricultural-produce support prices this year. SUV volumes
are also bottoming out and the upcoming launch of a new MPV has the potential
to boost growth. We see a strong 21% EPS Cagr over the next two years, while
15x FY19CL PE is reasonable. We maintain a BUY rating and Rs1,120 target.
23 August 2018 Healthy demand in tractors; LCVs seeing strong cyclical recovery
M&M is benefitting from strong demand in tractors and LCVs, which together
India form around 70% of its standalone Ebit (including Mahindra Vehicle
Autos Manufacturers). Rainfall has been weak so far this year (~8% below normal) but
distribution has been good and the big hike in minimum agricultural-produce
Reuters MAHM.BO support prices should support tractor demand. The outlook for FY20 is a bit
Bloomberg MM IB uncertain but the industry is still in the third year of an upcycle, which historically
last for an average of 4.7 years. New launches have helped the company gain
share in tractors. LCVs are seeing a strong cyclical recovery after a three-year
downturn (FY14-16); growth momentum should sustain over the next two years.
12M hi/lo Rs976.65/615.53
SUVs weak but bottoming out; product triggers ahead
±% potential +17%
M&M’s SUV business (c.30% of Ebit) has been under pressure, but even here its
rural-focussed models, such as Bolero, have started to see an improvement on a
Shares in issue 1,243.2m low base. M&M plans to launch a new MPV in 2QFY19 and new urban SUV in
Free float (est.) 78.4% 2HFY19. India’s MPV market currently has limited products with large price gaps
- M&M’s upcoming launch could boost company volumes if designed well and
priced appropriately. A weak presence in urban SUVs is a result of the TUV and
3M ADV US$35.0m KUV models, launched in 2015-16, not seeing much success. While expectations
from the new SUV in 2HFY19 are low, any success here has the potential to
Major shareholders
improve the franchise in the fast-growing urban SUV market, and would be seen
Promoters 12.8% as a positive for the company.
Treasury shares 8.8%
Good growth outlook; valuations reasonable despite recent stock rally
We expect M&M to deliver strong 13% volume and 21% earnings Cagrs in FY19-
20. The stock trades at 15x the auto business’s FY19CL PE, which is in line with
its historical average multiple. We rate M&M as a BUY with a target price of
Rs1,120, and value its auto business at 16x Mar-20CL PE.
1M 3M 12M
(Rs) (%)
1,000 Mahindra (LHS) 110 Net profit (Rsm) 35,992 39,224 49,478 57,682 57,697
Rel to Nifty
950 105 EPS (Rs) 29.0 31.6 39.8 46.4 46.4
900
100 CL/consensus (36) (EPS%) - - 96 98 92
850
EPS growth (% YoY) 15.3 8.9 26.1 16.6 0.0
800 95
PE (x) - auto 33.1 18.8 14.9 12.9 13.1
750 90
700
Dividend yield (%) 0.7 0.8 0.9 1.0 1.2
85
650 FCF yield (%) (1.6) 1.6 0.9 1.5 1.7
600 80 PB (x) 4.6 3.9 3.5 3.1 2.8
550 75 ROE (%) 15.2 14.0 15.4 15.9 14.2
Aug 16 Apr 17 Dec 17 Aug 18 Net debt/equity (%) (5.1) (12.3) (13.8) (16.7) (19.6)
Mahindra - BUY India strategy
Profit & Loss (Rsm)

Revenue 437,854 486,856 567,470 16.6 643,354 685,450
Cogs (ex-D&A) (318,027) (341,347) (401,233) (455,039) (488,031)
Op Ebitda 47,693 62,240 76,604 23.1 88,624 89,793
Op Ebit 34,421 47,446 60,198 26.9 70,329 68,453
Net interest inc/(exp) (1,456) (1,122) (1,150) (1,150) (1,150)
Taxation (12,319) (17,464) (21,521) (25,016) (25,023)
Profit after tax 35,992 39,224 49,478 26.1 57,682 57,697
Net profit 35,992 39,224 49,478 26.1 57,682 57,697
Adjusted profit 34,725 39,224 49,436 26 57,682 57,697
Working capital changes 16,703 9,565 4,579 (52.1) 4,303 2,359
Other items (24,685) (1,535) (21,521) (25,016) (25,023)
Free cashflow (19,323) 19,411 10,161 (47.7) 18,411 20,629
M&A/Others 48,699 4,185 12,096 189.1 13,519 15,417
Net investing cashflow (10,336) (46,676) (37,404) (35,981) (31,083)
Increase in loans (1,013) 1,424 - - -
Dividends (17,692) (10,545) (11,439) (13,458) (15,477)
Net equity raised/other (15,715) 13,425 (1,150) (1,150) (1,150)
Net financing cashflow (34,420) 4,304 (12,589) (14,608) (16,627)
Incr/(decr) in net cash (5,044) 27,899 9,668 (65.3) 17,322 19,419
Exch rate movements - (2,295) - - -
Fixed assets 96,726 109,881 126,476 15.1 141,181 149,840
Investments 143,135 167,903 184,403 9.8 200,903 217,403
Total assets 393,383 474,168 526,787 11.1 584,578 634,234
Long-term debt/CBs 28,156 29,581 29,581 0 29,581 29,581
Ebitda margin (%) 10.9 12.8 13.5 13.8 13.1
Ebit margin (%) 7.9 9.7 10.6 10.9 10.0
Op cashflow growth (% YoY) (27.5) 77.0 (15.1) 13.8 (1.2)
Capex/sales (%) 13.5 10.4 8.7 7.7 6.8
Net debt/equity (%) (5.1) (12.3) (13.8) (16.7) (19.6)
ROE (%) 15.2 14.0 15.4 15.9 14.2
ROIC (%) 24.4 30.9 38.4 40.7 37.1
110 nitij.mangal@clsa.com 23 August 2018

Valuation details
Our target price is based on 16x Mar-20CL auto business PE together with the
value of listed subsidiaries (after 20% holdco discount).
Investment risks
Weaker-than-expected demand in tractor and LCV segments.
Recommendation history of Mahindra & Mahindra Ltd (MM IB)

Nitij Mangal BUY O-PF
Stock price (Rs)
No coverage N-R
1,100
1,000
900
800
700
600

08 Aug 2018 BUY 1,120.00 27 Nov 2016 U-PF 615.00*
30 May 2018 BUY 1,075.00 12 Nov 2016 O-PF 725.00*
17 Apr 2018 BUY 960.00 11 Aug 2016 O-PF 757.50*
02 Jan 2018 BUY 910.00 31 May 2016 O-PF 720.00*
13 Nov 2017 BUY 885.00* 18 Apr 2016 O-PF 735.00*
05 Oct 2017 BUY 805.00* 02 Mar 2016 O-PF 702.50*
05 Aug 2017 O-PF 792.50* 12 Feb 2016 BUY 700.00*
31 May 2017 O-PF 775.00* 09 Nov 2015 BUY 750.00*
11 Feb 2017 U-PF 640.00* 08 Sep 2015 BUY 735.00*
23 August 2018 nitij.mangal@clsa.com 111

Detailed financials
Profit & Loss (Rsm)
Revenue 389,454 408,850 437,854 486,856 567,470 643,354 685,450
Cogs (ex-D&A) (279,555) (295,666) (318,027) (341,347) (401,233) (455,039) (488,031)
Other SG&A (45,142) (44,853) (47,550) (56,145) (60,385) (68,047) (73,731)
Op Ebitda 42,598 45,702 47,693 62,240 76,604 88,624 89,793
Op Ebit 32,849 34,616 34,421 47,446 60,198 70,329 68,453
Interest expense (2,143) (1,553) (1,456) (1,122) (1,150) (1,150) (1,150)
Net interest inc/(exp) (2,143) (1,553) (1,456) (1,122) (1,150) (1,150) (1,150)
Asset revaluation/Exceptional items 873 241 1,920 - 63 - -
Taxation (8,478) (10,624) (12,319) (17,464) (21,521) (25,016) (25,023)
Profit after tax 31,590 31,228 35,992 39,224 49,478 57,682 57,697
Net profit 31,590 31,228 35,992 39,224 49,478 57,682 57,697
Extraordinaries/others 1,621 447 3,565 4,336 146 0 0
Dividends (8,469) (8,417) (9,275) (10,545) (11,439) (13,458) (15,477)
Retained profit 24,742 23,257 30,281 33,015 38,184 44,224 42,220
Adjusted profit 31,014 31,069 34,725 39,224 49,436 57,682 57,697
EPS (Rs) 25.4 25.1 29.0 31.6 39.8 46.4 46.4
Core EPS (Rs) 25.0 25.0 28.0 31.6 39.8 46.4 46.4
DPS (Rs) 6.3 6.3 6.5 7.5 8.5 10.0 11.5

Growth (%)
Revenue growth (% YoY) (3.9) 5.0 7.1 11.2 16.6 13.4 6.5
Ebitda growth (% YoY) (9.8) 7.3 4.4 30.5 23.1 15.7 1.3
Ebit growth (% YoY) (14.9) 5.4 (0.6) 37.8 26.9 16.8 (2.7)
Net profit growth (%) (14.7) (1.1) 15.3 9.0 26.1 16.6 0.0
EPS growth (% YoY) (15.5) (1.1) 15.3 8.9 26.1 16.6 0.0
Adj EPS growth (% YoY) (17.0) 0.2 11.8 12.9 26.0 16.7 0.0
DPS growth (% YoY) (13.7) (0.2) 3.4 15.4 13.3 17.6 15.0
Core EPS growth (% YoY) (17.0) 0.2 11.8 12.9 26.0 16.7 0.0
Margins (%)
Ebitda margin (%) 10.9 11.2 10.9 12.8 13.5 13.8 13.1
Ebit margin (%) 8.4 8.5 7.9 9.7 10.6 10.9 10.0
Returns (%)
ROE (%) 17.5 15.2 15.2 14.0 15.4 15.9 14.2
ROA (%) 8.1 7.4 6.8 7.6 8.4 8.8 7.8
ROIC (%) 32.1 27.5 24.4 30.9 38.4 40.7 37.1
ROCE (%) 23.8 23.1 17.8 19.2 22.3 23.6 21.2
Dividend payout (%) 24.8 25.0 22.4 23.8 21.4 21.6 24.8

Balance sheet (Rsm)

Inventories 24,376 26,879 27,156 27,017 31,550 35,810 38,145
Current assets 93,077 104,116 131,735 179,831 199,356 225,941 250,438
Fixed assets 81,082 95,184 96,726 109,881 126,476 141,181 149,840
Investments 114,201 111,870 143,135 167,903 184,403 200,903 217,403
Goodwill 0 0 0 0 0 0 0
Total assets 329,448 364,124 393,383 474,168 526,787 584,578 634,234
Share capital 2,957 2,963 2,968 5,950 5,950 5,950 5,950
Reserves/others 42,099 42,381 43,713 44,933 44,932 44,932 44,933
Total equity 192,551 217,072 256,696 302,940 341,124 385,348 427,569
Total debt 37,285 29,169 28,156 29,581 29,581 29,581 29,581
Net debt (543) (17,135) (13,103) (37,283) (46,951) (64,273) (83,692)
Adjusted EV 1,052,937 1,044,806 1,012,854 953,952 917,784 873,962 858,043
BVPS (Rs) 155.0 174.7 206.6 243.7 274.4 310.0 343.9

Key ratios
Current ratio (x) 1.0 1.0 1.3 1.3 1.3 1.4 1.5
Growth in capital employed (% YoY) 22.6 (2.9) 61.4 7.3 11.2 9.5 7.3
Gearing
Net debt/equity (%) (0.3) (7.9) (5.1) (12.3) (13.8) (16.7) (19.6)
Interest cover (x) 15.3 22.3 23.6 42.3 52.4 61.2 59.5
Debt Cover (x) 0.9 1.9 1.4 2.4 2.0 2.3 2.3
Inventory days 34.2 31.6 31.0 29.0 26.6 27.0 27.7
Debtor days 23.7 22.6 22.6 22.8 22.1 22.4 23.1
Creditor days 69.7 71.7 74.5 80.4 84.8 86.0 88.1
Working capital/Sales (%) (8.9) (11.6) (2.0) (4.8) (4.9) (5.0) (5.0)
Working capital/Capital employed (%) (22.7) (32.3) (3.7) (9.1) (9.8) (10.3) (10.3)
Other ratios (%)
EV/OCF (x) 32.7 19.1 25.5 13.6 15.4 12.9 12.8
EV/FCF (x) (750.5) (980.9) (52.4) 49.1 90.3 47.5 41.6
EV/Sales (x) 2.7 2.6 2.3 2.0 1.6 1.4 1.3

Cashflow (Rsm)
Working capital changes (2,277) 767 16,703 9,565 4,579 4,303 2,359
Tax paid (8,478) (10,624) (9,983) (12,112) (21,521) (25,016) (25,023)
Other non-cash operating items 351 18,941 (14,702) 10,578 0 0 0
Free cashflow (1,403) (1,065) (19,323) 19,411 10,161 18,411 20,629
Acq/inv/disposals 460 18,588 35,274 (6,179) 209 - -
Net investing cashflow (24,648) (28,714) (10,336) (46,676) (37,404) (35,981) (31,083)
Increase in loans (3,169) (8,115) (1,013) 1,424 - - -
Dividends (9,658) (8,470) (17,692) (10,545) (11,439) (13,458) (15,477)
Net equity raised/(buybacks) (1,668) (1,011) (15,715) 13,425 (1,150) (1,150) (1,150)
Net financing cashflow (14,494) (17,596) (34,420) 4,304 (12,589) (14,608) (16,627)
Incr/(decr) in net cash (6,948) 8,476 (5,044) 27,899 9,668 17,322 19,419
Exch rate movements - - - (2,295) - - -
Opening cash 44,776 37,828 46,304 41,260 66,864 76,532 93,854
Closing cash 37,828 46,304 41,260 66,864 76,532 93,854 113,273
OCF PS (Rs) 25.9 44.1 32.0 56.5 48.0 54.6 54.0
FCF PS (Rs) (1.1) (0.9) (15.6) 15.6 8.2 14.8 16.6

Growth (%)
Op cashflow growth (% YoY) (13.6) 70.2 (27.5) 77.0 (15.1) 13.8 (1.2)
FCF growth (% YoY) (122.9) - - - (47.7) 81.2 12.0
Capex growth (%) 7.8 66.2 5.7 (13.8) (2.7) 0.0 (6.1)
Capex/sales (%) 8.6 13.7 13.5 10.4 8.7 7.7 6.8
Free cashflow payout ratio (%) - - - 54.3 112.6 73.1 75.0
DuPont analysis
Ebit margin (%) 8.4 8.5 7.9 9.7 10.6 10.9 10.0
Asset turnover (x) 1.2 1.2 1.2 1.1 1.1 1.2 1.1
Tax burden (x) 0.8 0.7 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 8.1 7.4 6.8 7.6 8.4 8.8 7.8
Leverage (x) 1.8 1.7 1.6 1.6 1.6 1.5 1.5
ROE (%) 17.5 15.2 15.2 14.0 15.4 15.9 14.2
EVA® analysis
Ebit adj for tax 25,899 25,829 25,644 32,829 41,951 49,054 47,746
ROIC (%) 32.1 27.5 24.4 30.9 38.4 40.7 37.1
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
EVA/IC (%) 20.0 15.6 12.5 19.1 26.7 29.0 25.3
EVA (Rsm) 16,179 14,629 13,139 20,337 29,114 34,898 32,607

Maruti Suzuki
Rs9,105.05 - BUY
Nitij Mangal Raising the bar

nitij.mangal@clsa.com An improved franchise, easing competition and high earnings visibility
+91 22 6650 5064
Successful new products in recent years have led to a strong India franchise
Sagar Sahu becoming even more solid. This, along with its differentiated sales strategy, has
+91 22 6650 5087 boosted confidence in the sustainability of its dominant market share in the
long-term. Competition is also easing as several global OEMs are focussing back
on their key markets rather than on India. Maruti’s 29x FY19CL PE is not cheap
but should sustain given improved long-term outlook and high earnings visibility.
We rate it a BUY with a target price of Rs11,300.
A strong franchise has become even more solid

23 August 2018
The success of new products, launched in the last five years, has strengthened
India Maruti’s leadership position across most passenger vehicle (PV) segments. Its
premium dealership channel, Nexa, is also making its brand more acceptable in
Autos the higher-priced segment. This strategy is tough for peers to replicate. A
stronger portfolio and differentiated sales strategy has boosted confidence in the
Reuters MRTI.BO long-term sustainability of its market share dominance.
Bloomberg MSIL IB

Competitive intensity easing; industry demand outlook healthy
CNX Nifty @ 11,570.9 Competition in the Indian PV market has started to ease after years of rise. The
number of models available in the market doubled over FY08-16 but is now
12M hi/lo Rs9,820.35/7,498.45 plateauing. Moreover, most new launches are limited to SUVs, which form just
c.14% of Maruti’s volumes. Several global OEMs are focussing back on their key
±% potential +24% markets, due to India remaining a marginal contributor for them - despite high
investment. India’s PV demand remains healthy and we expect a 9% volume Cagr
Shares in issue 302.0m in FY19-21. Longer term, PVs have strong potential in India given low penetration
Free float (est.) 43.8% levels and high aspiration.
Some costs pressures but has levers to offset
3M ADV US$66.8m Maruti has been commendably able to protect its margins, despite rising input
prices and a weaker rupee, mainly through internal cost controls. While cost
pressures remain, the company has the potential to take price hikes, especially in
Major shareholders
Suzuki Motors 56.2%
the context of its capacity constraints. Increasing localisation at its Gujarat plant
and a gradual lowering of royalty rates should also provide margin support.
Improving long-term outlook justifies premium multiple; BUY

Maruti’s 29x FY19CL PE is not cheap, but should sustain given growing the
confidence in market-share sustainability, a healthy growth outlook and high
earnings visibility. We base our target on 30x Mar-20CL PE and rate the company
Stock performance (%) a BUY.
1M 3M 12M
Absolute (3.0) 8.0 21.2 Financials
Relative (7.7) (1.8) 2.2 Year to 31 March 17A 18A 19CL 20CL 21CL
Abs (US$) (4.5) 5.2 11.2 Revenue (Rsm) 680,348 797,627 914,233 1,047,699 1,190,360
(Rs) (%)
10,500 170 Net profit (Rsm) 73,377 77,218 94,980 113,748 130,672
9,500
160 EPS (Rs) 243.0 261.2 314.5 376.6 432.7
150 CL/consensus (38) (EPS%) - - 100 99 104
8,500
140 EPS growth (% YoY) 60.5 7.5 20.4 19.8 14.9
7,500 130 PE (x) 37.5 34.9 29.0 24.2 21.0
6,500
120 Dividend yield (%) 0.8 0.9 1.0 1.2 1.4
110 FCF yield (%) 2.5 2.9 2.4 2.6 3.0
5,500 Maruti Suzuki 100 PB (x) 7.6 6.6 5.8 5.0 4.3
Rel to Nifty (RHS)
4,500 90 ROE (%) 23.2 19.8 21.2 22.1 22.0
Aug 16 Apr 17 Dec 17 Aug 18 Net debt/equity (%) (74.4) (81.5) (82.9) (83.3) (83.6)
Maruti Suzuki - BUY India strategy
Profit & Loss (Rsm)

Revenue 680,348 797,627 914,233 14.6 1,047,699 1,190,360
Cogs (ex-D&A) (422,495) (449,820) (451,997) (454,442) (437,398)
Op Ebitda 103,530 120,615 139,708 15.8 159,999 182,240
Op Ebit 77,509 93,036 110,308 18.6 128,891 148,127
Net interest inc/(exp) (894) (950) (893) (893) (893)
Taxation (26,036) (32,816) (38,795) (46,460) (53,373)
Profit after tax 73,377 77,218 94,980 23 113,748 130,672
Net profit 73,377 77,218 94,980 23 113,748 130,672
Adjusted profit 73,377 78,873 94,980 20.4 113,748 130,672
Working capital changes 46,676 30,186 5,992 (80.1) (1,310) (4,368)
Other items (47,359) (32,951) (38,795) (46,460) (53,373)
Free cashflow 68,961 78,932 66,905 (15.2) 72,229 82,499
M&A/Others 37,225 15,622 24,360 55.9 20,128 24,730
Net investing cashflow 3,339 (23,296) (15,640) (19,872) (17,271)
Increase in loans 1,633 (4,678) (893) (893) (893)
Dividends (10,573) (29,134) (34,588) (40,049) (45,511)
Net equity raised/other (7) 7,000 - 12,082 12,082
Incr/(decr) in net cash 97,239 67,742 55,785 (17.7) 63,497 72,907
Exch rate movements - - - - -
Other current assets 52,834 45,867 46,333 1 48,621 50,402
Fixed assets 145,415 154,849 165,449 6.8 174,340 182,227
Investments 8,626 12,082 12,082 0 12,082 12,082
Total assets 509,933 593,701 662,553 11.6 739,655 824,816
Short-term debt 4,836 1,108 1,108 0 1,108 1,108
Long-term debt/CBs - - - - -
Ebitda margin (%) 15.2 15.1 15.3 15.3 15.3
Ebit margin (%) 11.4 11.7 12.1 12.3 12.4
Op cashflow growth (% YoY) 22.0 14.6 (9.3) 5.0 10.9
Capex/sales (%) 5.0 4.9 4.4 3.8 3.5
Net debt/equity (%) (74.4) (81.5) (82.9) (83.3) (83.6)
ROE (%) 23.2 19.8 21.2 22.1 22.0
ROIC (%) 61.0 81.9 107.3 113.9 114.8

Valuation details
We value Maruti Suzuki at 30x Mar-20CL PE. Its PE multiple has expanded from
15x over 2006-14 to around 27x currently. We believe that a higher multiple is
justified given the company’s improving franchise and rising confidence on
sustainability of market share.
Investment risks
The key risk is a sharp downturn in Indian PV industry demand.
Recommendation history of Maruti Suzuki India Ltd (MSIL IB)

Nitij Mangal BUY O-PF
12,000 Other analysts U-PF SELL
Stock price (Rs)
No coverage N-R
10,000
8,000
6,000
4,000

04 Jan 2018 BUY 11,300.00 08 Sep 2016 BUY 6,350.00
29 Oct 2017 BUY 10,000.00 23 Aug 2016 BUY 5,850.00
28 Jul 2017 BUY 9,230.00 27 Jul 2016 O-PF 5,000.00
23 May 2017 BUY 8,100.00 02 Jun 2016 O-PF 4,500.00
28 Apr 2017 BUY 7,600.00 30 Mar 2016 O-PF 4,150.00
04 Jan 2017 BUY 6,650.00 02 Mar 2016 BUY 4,220.00
27 Nov 2016 BUY 6,050.00 29 Jan 2016 BUY 5,050.00
28 Oct 2016 BUY 7,300.00 28 Oct 2015 BUY 5,700.00
Source: CLSA

Detailed financials
Profit & Loss (Rsm)
Revenue 499,706 577,463 680,348 797,627 914,233 1,047,699 1,190,360
Cogs (ex-D&A) (324,119) (357,138) (422,495) (449,820) (451,997) (454,442) (437,398)
Other SG&A (25,113) (31,717) (33,848) (45,118) (53,688) (58,380) (62,766)
Op Ebitda 67,829 89,785 103,530 120,615 139,708 159,999 182,240
Op Ebit 43,126 61,546 77,509 93,036 110,308 128,891 148,127
Interest expense (2,060) (815) (894) (950) (893) (893) (893)
Net interest inc/(exp) (2,060) (815) (894) (950) (893) (893) (893)
Asset sales/other cash items - - - 0 - - -
Asset revaluation/Exceptional items (166) - - (2,507) - - -
Taxation (11,570) (19,636) (26,036) (32,816) (38,795) (46,460) (53,373)
Profit after tax 37,646 45,714 73,377 77,218 94,980 113,748 130,672
Net profit 37,646 45,714 73,377 77,218 94,980 113,748 130,672
Extraordinaries/others 534 0 0 1,655 0 0 0
Dividends (9,090) (12,725) (27,268) (29,134) (34,588) (40,049) (45,511)
Retained profit 29,089 32,989 46,109 49,739 60,392 73,699 85,162
Adjusted profit 37,755 45,714 73,377 78,873 94,980 113,748 130,672
EPS (Rs) 125.0 151.4 243.0 261.2 314.5 376.6 432.7
Core EPS (Rs) 125.0 151.4 243.0 261.2 314.5 376.6 432.7
DPS (Rs) 25.0 35.0 75.0 80.0 95.0 110.0 125.0

Growth (%)
Ebit growth (% YoY) 39.0 42.7 25.9 20.0 18.6 16.8 14.9
EPS growth (% YoY) 35.7 21.1 60.5 7.5 20.4 19.8 14.9
DPS growth (% YoY) 108.3 40.0 114.3 6.7 18.7 15.8 13.6
Margins (%)
Ebitda margin (%) 13.6 15.5 15.2 15.1 15.3 15.3 15.3
Ebit margin (%) 8.6 10.7 11.4 11.7 12.1 12.3 12.4
Returns (%)
ROE (%) 16.9 18.0 23.2 19.8 21.2 22.1 22.0
ROA (%) 10.3 11.8 12.7 11.8 12.5 13.1 13.4
ROIC (%) 26.9 39.6 61.0 81.9 107.3 113.9 114.8
ROCE (%) 47.0 78.3 97.8 114.1 149.9 159.1 160.6
Exceptional or extraord. inc/PBT (%) (0.3) 0.0 0.0 (2.3) 0.0 0.0 0.0
Dividend payout (%) 20.0 23.1 30.9 30.6 30.2 29.2 28.9

Balance sheet (Rsm)

Inventories 26,150 31,321 32,622 31,608 32,074 34,362 36,143
Current assets 166,729 223,359 338,615 402,016 460,268 528,478 605,753
Fixed assets 141,421 137,747 145,415 154,849 165,449 174,340 182,227
Investments 1,698 1,698 8,626 12,082 12,082 12,082 12,082
Goodwill 0 0 0 0 0 0 0
Total assets 335,510 391,956 509,933 593,701 662,553 739,655 824,816
Short term loans/OD 354 774 4,836 1,108 1,108 1,108 1,108
Accrued expenses 334 228 27 20 20 20 20
Taxes payable 2,395 3,001 0 0 0 0 0
Long-term debt/leases/other 4,802 1,535 - - - - -
Share capital 1,510 1,510 1,510 1,510 1,510 1,510 1,510
Reserves/others 38,164 42,775 49,612 53,055 53,055 53,055 53,055
Total equity 237,042 270,071 361,711 417,573 477,965 551,664 636,826
Total debt 5,156 2,309 4,836 1,108 1,108 1,108 1,108
Net debt (121,469) (174,241) (268,953) (340,423) (396,208) (459,705) (532,612)
Adjusted EV 2,607,730 2,563,717 2,459,623 2,375,961 2,310,176 2,236,679 2,171,772
BVPS (Rs) 784.9 894.3 1,197.7 1,382.7 1,582.7 1,826.7 2,108.7

Key ratios
Current ratio (x) 1.9 1.9 2.4 2.4 2.6 2.9 3.3
Growth in capital employed (% YoY) (3.2) (26.1) 37.4 (22.3) 6.5 13.4 14.2
Gearing
Net debt/equity (%) (51.2) (64.5) (74.4) (81.5) (82.9) (83.3) (83.6)
Interest cover (x) 20.9 75.5 86.7 97.9 123.5 144.4 165.9
Debt Cover (x) 12.4 36.5 21.3 106.4 96.5 101.3 112.4
Inventory days 24.3 29.4 27.6 26.1 25.7 26.7 29.4
Debtor days 9.1 7.5 6.7 6.1 6.2 6.2 6.2
Creditor days 58.9 64.3 66.4 76.5 88.2 92.5 97.5
Working capital/Sales (%) (9.7) (11.8) (10.9) (13.7) (12.6) (10.8) (9.2)
Sales/Capital employed (%) 553.1 864.9 741.5 1,118.6 1,204.3 1,216.6 1,210.1
Working capital/Capital employed (%) (53.6) (101.9) (80.6) (152.8) (151.4) (132.0) (111.1)
Other ratios (%)
EV/OCF (x) 40.7 30.4 23.9 20.2 21.6 19.9 17.4
EV/FCF (x) 82.4 43.9 35.7 30.1 34.5 31.0 26.3
EV/Sales (x) 5.2 4.4 3.6 3.0 2.5 2.1 1.8

Cashflow (Rsm)
Working capital changes 10,529 12,152 46,676 30,186 5,992 (1,310) (4,368)
Tax paid (12,322) (20,414) (23,317) (33,495) (38,795) (46,460) (53,373)
Other non-cash operating items (1,930) 2,808 (24,042) 544 0 0 0
Free cashflow 31,638 58,396 68,961 78,932 66,905 72,229 82,499
Acq/inv/disposals 277 (338) 14,427 (4,833) - (12,082) (12,082)
Net investing cashflow (23,875) (21,654) 3,339 (23,296) (15,640) (19,872) (17,271)
Increase in loans (15,143) (3,662) 1,633 (4,678) (893) (893) (893)
Dividends (4,241) (9,090) (10,573) (29,134) (34,588) (40,049) (45,511)
Net equity raised/(buybacks) 0 0 (7) 7,000 - 12,082 12,082
Incr/(decr) in net cash 20,847 49,925 97,239 67,742 55,785 63,497 72,907
Exch rate movements - - - - - - -
Opening cash 105,778 126,625 176,550 273,789 341,531 397,316 460,813
Closing cash 126,625 176,550 273,789 341,531 397,316 460,813 533,720
OCF PS (Rs) 212.3 279.2 340.6 390.2 354.0 371.6 412.2
FCF PS (Rs) 104.8 193.4 228.3 261.4 221.5 239.2 273.2

Growth (%)
Op cashflow growth (% YoY) 30.7 31.5 22.0 14.6 (9.3) 5.0 10.9
FCF growth (% YoY) 125.2 84.6 18.1 14.5 (15.2) 8.0 14.2
Capex growth (%) (7.2) (20.1) 30.7 14.8 2.8 0.0 5.0
Capex/sales (%) 6.5 4.5 5.0 4.9 4.4 3.8 3.5
DuPont analysis
Ebit margin (%) 8.6 10.7 11.4 11.7 12.1 12.3 12.4
Asset turnover (x) 1.6 1.6 1.5 1.4 1.5 1.5 1.5
Tax burden (x) 0.8 0.7 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 10.3 11.8 12.7 11.8 12.5 13.1 13.4
Leverage (x) 1.4 1.4 1.4 1.4 1.4 1.4 1.3
ROE (%) 16.9 18.0 23.2 19.8 21.2 22.1 22.0
EVA® analysis
Ebit adj for tax 32,988 43,053 57,210 65,289 78,319 91,512 105,170
ROIC (%) 26.9 39.6 61.0 81.9 107.3 113.9 114.8
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
EVA/IC (%) 15.0 27.8 49.1 70.1 95.5 102.1 103.0
EVA (Rsm) 18,329 30,255 46,063 55,905 69,712 82,032 94,365

Sun Pharma
Rs635.25 - BUY
Alok Dalal Gaining momentum

alok.dalal@clsa.com Specialty pipeline monetisation progressing well
+91 22 6650 5063
The resolution of regulatory issues with the US FDA, monetisation of the
Alok Srivastava specialty pipeline in the US - with three launches in FY19 and ramp-up in
+91 22 6650 5037 launches made last year - along with improving growth profile in India and Ems
are driving Sun Pharma to revert to its historical earnings growth trajectory of
20%. While challenges in America’s generic space remains, strong strategy
execution in other verticals can drive earnings growth. We reiterate our BUY
rating and rounded target price of Rs750.
23 August 2018 Earnings growth returns to 20% trajectory

We believe Sun Pharma is well placed to revert to its historical earnings growth
India trajectory of 20%, due to resolved regulatory issues with the US FDA,
Healthcare monetisation of its American specialty pipeline and improving growth profile in
India and EMs. While challenges in the US generic space remain, strong execution
Reuters SUN.BO strategy in other verticals can drive earnings.
Bloomberg SUNP IB
Specialty launches in the USA on track
Sun guided for three US specialty product launches in FY19: Yonza was recently
launched, Ilumya’s launch is for 2QFY19 and Cequa recently won US FDA
12M hi/lo Rs638.85/443.80 approval. In addition, products launched 18 months ago are scaling up well. These
launches signal the start of the monetisation phase of this vertical; ramp-up
12M price target Rs750.00
±% potential +18%
should be visible in FY20. A strong balance sheet should allow the company to
pursue more opportunities in the specialty space.
Shares in issue 2,399.0m
Free float (est.) 45.3% India and EM gaining strength
Sun is the largest player in India, with a value market share of 8.3%. It has a
leadership position in fast-growing chronic areas like cardiac, neuro science and
3M ADV US$61.0m diabetes. With a strong India presence, it should gain market share and grow
ahead of the market. Its EM business is gaining scale with Romania, Africa and
Southeast Asia being the major markets.
Major shareholders
Promoters 54.7% Execution is the key; Maintain BUY
Foreign Institutions 23.8% We believe Sun has a solid platform in the specialty segment and strong
execution can lead to a rerating. Assuming a base business value of Rs708 (25x
Sep-20CL EPS) and Rs39/share as the value of its specialty pipeline, we maintain
a BUY rating and SOTP-derived rounded-off target of Rs750.

1M 3M 12M
(Rs) (%)
850
Sun Pharma (LHS)
110 Net profit (Rsm) 69,544 21,870 45,892 61,794 73,971
800 Rel to Nifty 100 EPS (Rs) 28.9 9.1 19.1 25.8 30.8
750
90 CL/consensus (35) (EPS%) - - 108 107 108
700
EPS growth (% YoY) 47.5 (68.5) 110.0 34.7 19.7
650 80
Adjusted EPS (Rs) 28.9 13.1 19.1 25.8 30.8
600 70
550
Adj EPS growth (% YoY) 33.1 (54.8) 46.4 34.7 19.7
60
500 PE (x) 22.0 69.7 33.2 24.7 20.6
450 50 Dividend yield (%) 0.2 0.4 0.5 0.6 0.7
400 40 PB (x) 4.2 4.0 3.6 3.2 2.8
Aug 16 Apr 17 Dec 17 Aug 18 ROE (%) 20.0 5.8 11.4 13.8 14.7
Sun Pharma - BUY India strategy
Profit & Loss (Rsm)

Revenue 315,784 264,895 306,302 15.6 350,875 391,087
Cogs (ex-D&A) (81,307) (74,247) (87,182) (101,754) (109,504)
Op Ebitda 100,893 56,081 69,881 24.6 87,702 103,768
Op Ebit 88,245 41,083 53,270 29.7 70,792 86,207
Net interest inc/(exp) 2,234 3,212 5,089 58.4 9,427 11,487
Other non-Op items 0 (9,505) 0 - -
Taxation (12,116) (8,452) (8,482) (14,439) (19,539)
Profit after tax 78,363 26,338 49,877 89.4 65,780 78,156
Minority interest (8,819) (4,468) (3,986) (3,986) (4,185)
Net profit 69,544 21,870 45,892 109.8 61,794 73,971
Adjusted profit 69,544 31,375 45,892 46.3 61,794 73,971
Working capital changes (4,092) (23,290) 19,060 (9,701) (11,283)
Other items (21,383) (11,664) (13,570) (23,867) (31,026)
Free cashflow 38,489 1,777 60,371 3,296.9 39,135 46,458
M&A/Others 7,626 (26,482) 14,486 23,163 27,284
Net investing cashflow (29,303) (45,832) (514) 8,163 12,284
Increase in loans 10,721 16,616 0 0 0
Dividends (2,889) (5,614) (7,017) (9,824) (11,227)
Net equity raised/other (34,423) (38,121) (5,448) (5,449) (5,449)
Incr/(decr) in net cash 19,523 (51,823) 62,392 47,025 57,066
Exch rate movements - - 1,179 1,180 1,180
Accounts receivable 72,026 78,153 67,386 (13.8) 77,193 86,039
Other current assets 93,537 96,536 98,504 2 112,920 122,321
Fixed assets 100,601 104,952 103,341 (1.5) 101,432 98,871
Investments 11,918 50,000 50,000 0 50,000 50,000
Intangible assets 104,165 104,165 104,165 0 104,165 104,165
Other non-current assets 77,299 111,500 113,258 1.6 115,279 117,604
Total assets 610,885 644,822 699,741 8.5 772,281 848,538
Short-term debt 66,549 79,797 79,797 0 79,797 79,797
Long-term debt/CBs 15,409 18,777 18,777 0 18,777 18,777
Provisions/other LT liabs 190 190 190 0 190 190
Minorities/other equity 37,908 42,377 46,362 9.4 50,348 54,533
Revenue growth (% YoY) 10.9 (16.1) 15.6 14.6 11.5
Ebitda margin (%) 31.9 21.2 22.8 25.0 26.5
Ebit margin (%) 27.9 15.5 17.4 20.2 22.0
Net profit growth (%) 53.0 (68.6) 109.8 34.7 19.7
Op cashflow growth (% YoY) 3.8 (72.0) 256.7 (28.2) 13.5
Capex/sales (%) 11.7 7.3 4.9 4.3 3.8
Net debt/equity (%) (17.2) (0.2) (13.8) (21.5) (28.9)
ROE (%) 20.0 5.8 11.4 13.8 14.7
ROIC (%) 24.3 8.9 12.5 16.3 18.9
122 alok.dalal@clsa.com 23 August 2018

Valuation details
We value Sun Pharma on a sum-of-the-parts basis. We value the base business at
25x forward 12-month PE, a premium to the PE of the sector to arrive at value of
Rs708/share. We add Rs39/share as the value of Sun's specialty pipeline based
on NPV methodology. We thus arrive at a rounded SOTP-based target price of
Rs750/share. We use a PE-based valuation approach across our universe as we
believe it better captures growth potential and allows investors to easily compare
stocks across subsectors.
Investment risks
Key risks include delay in approvals from Halol, intense competition in Taro’s US
portfolio, inability to ramp-up specialty products pipeline, a tax-dispute loss,
which may result in a one-time charge of Rs39bn (12% of net worth) and any
adverse outcome from the US Department of Justice inquiry on price collusion in
the country.
Recommendation history of Sun Pharmaceutical Industries Ltd (SUNP IB)

Alok Dalal BUY O-PF
Stock price (Rs)
No coverage N-R
1,000
800
600
400

15 Aug 2018 BUY 750.00 13 Jan 2017 BUY 800.00
28 May 2018 BUY 600.00 14 Dec 2016 BUY 880.00
22 Mar 2018 SELL 445.00 11 Nov 2016 BUY 980.00
05 Jan 2018 SELL 430.00 13 Aug 2016 BUY 1,050.00
15 Nov 2017 SELL 390.00 31 May 2016 BUY 1,020.00
13 Aug 2017 SELL 370.00 13 Feb 2016 BUY 1,060.00
28 May 2017 SELL 500.00 21 Dec 2015 BUY 950.00
13 Apr 2017 BUY 860.00 23 Nov 2015 BUY 975.00
15 Feb 2017 BUY 790.00 15 Sep 2015 BUY 1,100.00
Source: CLSA
23 August 2018 alok.dalal@clsa.com 123

Detailed financials
Profit & Loss (Rsm)
Revenue 274,334 284,870 315,784 264,895 306,302 350,875 391,087
Cogs (ex-D&A) (67,392) (63,304) (81,307) (74,247) (87,182) (101,754) (109,504)
Research & development costs (18,558) (22,242) (21,459) (20,669) (22,150) (30,877) (33,242)
Other SG&A (44,567) (49,687) (40,895) (40,360) (41,590) (35,239) (39,277)
Op Ebitda 78,667 81,583 100,893 56,081 69,881 87,702 103,768
Op Ebit 66,720 71,208 88,245 41,083 53,270 70,792 86,207
Interest income 5,477 6,583 6,232 8,388 9,398 13,736 15,796
Interest expense (5,790) (5,232) (3,998) (5,176) (4,309) (4,309) (4,309)
Net interest inc/(exp) (313) 1,350 2,234 3,212 5,089 9,427 11,487
Asset revaluation/Exceptional items (2,378) (6,852) - (9,505) - - -
Taxation (9,147) (9,138) (12,116) (8,452) (8,482) (14,439) (19,539)
Profit after tax 54,882 56,569 78,363 26,338 49,877 65,780 78,156
Minority interest (9,363) (11,126) (8,819) (4,468) (3,986) (3,986) (4,185)
Net profit 45,519 45,443 69,544 21,870 45,892 61,794 73,971
Extraordinaries/others 2,378 6,852 0 0 0 0 0
Dividends (8,441) (11,263) (9,824) (5,614) (7,017) (9,824) (11,227)
Retained profit 39,456 41,031 59,720 16,256 38,875 51,971 62,744
Adjusted profit 47,897 52,294 69,544 31,375 45,892 61,794 73,971
EPS (Rs) 18.9 19.6 28.9 9.1 19.1 25.8 30.8
Core EPS (Rs) 21.4 21.7 28.9 13.1 19.1 25.8 30.8
DPS (Rs) 1.5 3.6 1.2 2.3 2.9 4.1 4.7

Growth (%)
Revenue growth (% YoY) 70.6 3.8 10.9 (16.1) 15.6 14.6 11.5
Ebitda growth (% YoY) 12.4 3.7 23.7 (44.4) 24.6 25.5 18.3
Ebit growth (% YoY) 1.2 6.7 23.9 (53.4) 29.7 32.9 21.8
Net profit growth (%) 44.9 (0.2) 53.0 (68.6) 109.8 34.7 19.7
EPS growth (% YoY) 24.6 3.7 47.5 (68.5) 110.0 34.7 19.7
Adj EPS growth (% YoY) (21.7) 1.6 33.1 (54.8) 46.4 34.7 19.7
DPS growth (% YoY) (48.4) 139.1 (66.7) 94.6 25.0 40.0 14.3
Core EPS growth (% YoY) (21.7) 1.6 33.1 (54.8) 46.4 34.7 19.7
Margins (%)
Ebitda margin (%) 28.7 28.6 31.9 21.2 22.8 25.0 26.5
Ebit margin (%) 24.3 25.0 27.9 15.5 17.4 20.2 22.0
Returns (%)
ROE (%) 20.6 15.5 20.0 5.8 11.4 13.8 14.7
ROA (%) 14.7 11.7 13.1 5.0 6.8 7.9 8.5
ROIC (%) 32.6 23.1 24.3 8.9 12.5 16.3 18.9
ROCE (%) 39.6 27.5 27.7 11.2 13.3 18.0 21.6
Ebitda/net int exp (x) 251.1 - - - - - -
Exceptional or extraord. inc/PBT (%) (3.7) (10.4) 0.0 (27.3) 0.0 0.0 0.0
Dividend payout (%) 8.0 18.4 4.2 25.7 15.3 15.9 15.2

Balance sheet (Rsm)

Inventories 56,680 64,225 68,328 68,807 68,002 79,368 85,413
Current assets 250,000 281,488 316,902 274,205 328,977 401,405 477,898
Fixed assets 85,070 87,866 100,601 104,952 103,341 101,432 98,871
Investments 27,163 18,298 11,918 50,000 50,000 50,000 50,000
Goodwill 37,010 56,347 55,362 55,362 55,362 55,362 55,362
Other intangible assets 25,131 36,264 48,803 48,803 48,803 48,803 48,803
Total assets 489,294 554,275 610,885 644,822 699,741 772,281 848,538
Short term loans/OD 62,279 52,061 66,549 79,797 79,797 79,797 79,797
Accrued expenses 0 0 0 0 0 0 0
Provisions/other LT liabs - 254 190 190 190 190 190
Share capital 2,405 2,407 2,399 2,399 2,399 2,399 2,399
Reserves/others - 0 0 0 0 0 0
Minorities/other equity 28,995 40,852 37,908 42,377 46,362 50,348 54,533
Total equity 284,893 370,677 404,305 424,756 467,656 523,653 590,621
Total debt 77,827 85,006 81,958 98,574 98,574 98,574 98,574
Net debt (32,154) (46,810) (69,381) (942) (64,513) (112,718) (170,964)
Adjusted EV 1,510,320 1,510,804 1,479,385 1,546,527 1,486,941 1,442,722 1,388,661
BVPS (Rs) 106.3 137.0 152.5 159.4 175.6 197.3 223.5

Key ratios
Current ratio (x) 1.3 1.9 1.7 1.4 1.5 1.7 2.0
Growth in capital employed (% YoY) 56.2 52.5 3.7 26.9 (5.4) 1.5 1.6
Gearing
Net debt/equity (%) (11.3) (12.6) (17.2) (0.2) (13.8) (21.5) (28.9)
Interest cover (x) 12.5 14.9 23.6 9.6 14.5 19.6 23.7
Debt Cover (x) 0.7 0.9 0.9 0.2 0.8 0.5 0.6
Inventory days 238.1 348.6 297.5 337.1 286.4 264.3 274.6
Debtor days 50.0 77.4 80.8 103.5 86.7 75.2 76.2
Creditor days 203.3 306.7 264.6 323.4 277.1 277.9 288.7
Other ratios (%)
EV/OCF (x) 27.1 20.8 19.6 73.2 19.7 26.7 22.6
EV/FCF (x) 47.0 39.1 38.4 870.2 24.6 36.9 29.9
EV/Sales (x) 5.5 5.3 4.7 5.8 4.9 4.1 3.6
23 August 2018 alok.dalal@clsa.com 125

Cashflow (Rsm)
Working capital changes (392) 2,468 (4,092) (23,290) 19,060 (9,701) (11,283)
Interest paid / other financial expenses 2,730 1,303 (854) (3,212) (5,089) (9,427) (11,487)
Tax paid (17,404) (19,885) (20,571) (8,452) (8,482) (14,439) (19,539)
Other non-cash operating items (7,785) 7,189 41 0 0 0 0
Free cashflow 32,158 38,623 38,489 1,777 60,371 39,135 46,458
Acq/inv/disposals (2,307) 5,647 2,986 (38,082) - - -
Int, invt & associate div 156 2,579 4,639 11,600 14,486 23,163 27,284
Net investing cashflow (25,810) (25,809) (29,303) (45,832) (514) 8,163 12,284
Increase in loans (5,479) (6,781) 10,721 16,616 0 0 0
Dividends (3,633) (8,687) (2,889) (5,614) (7,017) (9,824) (11,227)
Net equity raised/(buybacks) 12,068 (9,546) (34,423) (38,121) (5,448) (5,449) (5,449)
Net financing cashflow 2,956 (25,013) (26,591) (27,118) (12,465) (15,273) (16,676)
Incr/(decr) in net cash 32,963 21,836 19,523 (51,823) 62,392 47,025 57,066
Exch rate movements 1,116 0 - - 1,179 1,180 1,180
Opening cash 75,902 109,981 131,817 151,340 99,516 163,087 211,292
Closing cash 109,981 131,817 151,340 99,516 163,087 211,292 269,538
OCF PS (Rs) 24.9 30.2 31.4 8.8 31.4 22.6 25.6
FCF PS (Rs) 14.4 16.0 16.0 0.7 25.2 16.3 19.4

Growth (%)
Op cashflow growth (% YoY) (6.5) 30.2 3.8 (72.0) 256.7 (28.2) 13.5
FCF growth (% YoY) (36.5) 20.1 (0.3) (95.4) 3,296.9 (35.2) 18.7
Capex growth (%) 161.1 43.9 8.5 (47.6) (22.5) 0.0 0.0
Capex/sales (%) 8.6 11.9 11.7 7.3 4.9 4.3 3.8
DuPont analysis
Ebit margin (%) 24.3 25.0 27.9 15.5 17.4 20.2 22.0
Asset turnover (x) 0.7 0.5 0.5 0.4 0.5 0.5 0.5
Tax burden (x) 0.9 0.9 0.9 0.8 0.9 0.8 0.8
Return on assets (%) 14.7 11.7 13.1 5.0 6.8 7.9 8.5
Leverage (x) 1.6 1.6 1.5 1.5 1.5 1.5 1.5
ROE (%) 22.4 17.3 20.2 6.4 11.2 13.3 14.0
EVA® analysis
Ebit adj for tax 57,189 61,305 76,429 31,102 45,528 58,050 68,966
ROIC (%) 32.6 23.1 24.3 8.9 12.5 16.3 18.9
Cost of equity (%) 12.7 12.7 12.7 12.7 12.7 12.7 12.7
EVA/IC (%) 19.9 10.4 11.6 (3.8) (0.2) 3.6 6.2
EVA (Rsm) 34,884 27,561 36,486 (13,170) (658) 12,682 22,549

Appendices India strategy
Appendix 1: Key regional parties

Samajwadi Party (SP)
 State: Uttar Pradesh

 Seats won in 2014 elections: 5
 Likely association in 2019: SP; possibly Congress too; to form a strong
alliance to defeat BJP
The Samajwadi Party (SP), founded on 4 October 1992, is a recognised state

political party in India based in the state of Uttar Pradesh. It describes itself as a
democratic socialist party and is predominantly representing the interests of a
caste group called Other Backward Classes (OBCs).
Akhilesh Yadav
The party was one of several to emerge after the Janata Dal (People's League),
India's primary opposition party before the Bharatiya Janata Party (BJP), split into
several regional parties. The SP was founded by Mulayam Singh Yadav, former
chief minister of Uttar Pradesh and defence minister of India during the 1996-98
United Front government. The party is led by his son, Akhilesh Yadav, former
Chief Minister of Uttar Pradesh, after he was chosen as the President on 1
January 2017.
The party is currently divided into two factions due to differences between its
founder, Mulayam and his son and the party president, Akhilesh. The party lost
its stronghold in Uttar Pradesh after the 2017 State Elections, in which it won the
lowest tally of 47 seats since its inception.
Bahujan Samaj Party (BSP)
 State: Uttar Pradesh

 Likely association in 2019: SP; most likely Congress and RLD too; to form a
strong alliance to defeat BJP
The Bahujan Samaj Party (BSP) is a centrist national political party in India with
socialist leanings. It was formed to represent Bahujans (literally meaning "people
in majority"), referring to those from the Scheduled Castes, Scheduled Tribes and
Other Backward Castes (OBC) as well as minorities. The party claims to be
Mayawati
inspired by the philosophy of BR Ambedkar. The BSP was founded by a Dalit
charismatic leader Kanshi Ram in 1984, who was succeeded by Mayawati in
2003. The party's political symbol is an elephant. The party is based in Uttar
Pradesh.
The party failed to win a single seat in the 2014 Lok Sabha election. In the 2017
Uttar Pradesh elections, BSP was the second-largest party in terms of vote share
(over 22%), despite winning only 19 seats of the 403 seats.

All India Anna Dravida Munnetra Kazhagam (AIADMK)
 State: Tamil Nadu

 Likely association in 2019: Uncertain; could support BJP
All India Anna Dravida Munnetra Kazhagam (AIADMK) is a state political party in
Tamil Nadu and Puducherry. It is currently in power in Tamil Nadu. It is a
Dravidian party founded by MG Ramachandran (popularly known as MGR) in
O EK 1972 as a breakaway faction of the Dravida Munnetra Kazhagam (DMK).
Panneerselvam & Palaniswami
The party is currently led by Edappadi K Palaniswami and O Panneerselvam, who
are also the Chief Minister and the Deputy Chief Minister, respectively. The party
has won the Tamil Nadu assembly election seven times and is currently in power
in the state. It is also currently the third largest party in the Lok Sabha. After the
demise of former Chief Minister of Karmataka and AIADMK party leader, the
party split into two-three factions.
Dravida Munnetra Kazhagam (DMK)
 State: Tamil Nadu

 Likely association in 2019: Congress
Dravida Munnetra Kazhagam (DMK), a former member of the United Progressive

Alliance is a state political party in Tamil Nadu and Puducherry. It is a Dravidian party
founded by CN Annadurai as a breakaway faction from the Dravidar Kazhagam (known
as Justice Party until 1944) headed by Periyar. DMK was headed by ex-TN Chief
Minister M Karunanidhi from 1969 to 2018. After his recent death, his son MK Stalin is
MK Stalin expected to now lead. DMK holds the distinction of being the first party other than the
Indian National Congress, another member of the United Progressive Alliance, to win
state-level elections with a clear majority on its own in any state in India.
DMK, which is a major alliance partner of UPA, lost its party-in-power position in Tamil
Nadu to AIADMK in 2011 State elections - defeated due to an anti-incumbency factor.
However, it is still the second-largest party in the state and won 88 of 232 seats in the
2016 Tamil Nadu Legislative Assembly Elections.

Janata Dal (JDU)
 State: Bihar
 Likely association in 2019: BJP
Janata Dal (United) (JDU) is a centre-left political party with presence mainly in
Bihar and Jharkhand. It is headed by Nitish Kumar who is also the current Chief
Minister of Bihar. He had entered into a grand alliance with anti-BJP parties in
2015 Bihar elections but in July 2017, JD (U) broke out of the grand alliance of
opposition parties and formed the government in the state in alliance with the
BJP
Nitish Kumar
Biju Janata Dal (BJD)
 State: Orissa
 Likely association in 2019: Uncertain; voted in favour of BJP in recent no-
confidence motion
The Biju Janata Dal (BJD) is a state political party of Odisha led by Naveen
Patnaik, son of former state chief minister Biju Patnaik. It was founded on 26
December 1997. The BJD has participated in several ruling coalitions with the
Bharatiya Janata Party (BJP) both at the Centre and in Odisha. In the 2014 lower-
house elections, BJD won 20 seats and secured 117 legislative seats out of 147
Naveen Patnaik in the assembly election.
All India Trinomial Congress (TMC)
 State: West Bengal

 Likely association in 2019: Uncertain, possibly Congress
The All India Trinamool (abbreviated to AITMC, TMC or Trinamool Congress) is a

subnational state-level ruling political party in West Bengal. Founded on 1
January 1998, the party is led by chief minister of West Bengal Mamata Banerjee.
It is currently the fourth-largest party in Lok Sabha with 34 seats.
Mamata Banerjee After the 2014 Lok Sabha election, TMC gained national party status, because it
took above 6% votes from five different states. It retained its majority in the
2016 West Bengal Legislative Assembly Election and won 211 seats out of 294.

Communist Party of India (Marxist) (CPM)
 State: West Bengal, Kerala

 Likely association in 2019: Uncertain but against BJP
The Communist Party of India (Marxist) (CPM) is a left-wing Marxist political

party in India. The strength of the party is concentrated in the states of Kerala,
West Bengal and Tripura. The current general secretary of the party is Sitaram
Yechury. As of 2018, CPM is leading the state government in Kerala. It leads the
Left Front coalition of leftist parties in other states and the national parliament of
India. The party emerged out of a split from the Communist Party of India in
Sitaram Yechury 1964. The CPM strongly advocates anti-capitalism, anti-globalisation and anti-
imperialist sentiments.
CPM’s national vote share shrunk from 5.3% in 2009 to 3.3% in 2014. In West
Bengal, it lost its stronghold to AITMC and won only 26 of 294 seats. It lost the
Tripura State Assembly elections to the BJP ending CPM’s 25-year rule in the
state.
YSR Congress Party (YSR)
 State: Andhra Pradesh

 Seats won in 2014 elections: 9 (party founded in 2011)
 Likely association in 2019: Uncertain
YSR Congress Party or Yuvajana Sramika Rythu Congress Party is a regional

political party in the state of Andhra Pradesh. It was founded in 2011 after the
death of YS Rajasekhara Reddy (YSR), the former CM of the state from Congress.
There were rifts between the Congress and YSR’s son Jagan Reddy, who broke
away from Congress and now heads this party.
Jagan Mohan Reddy The party currently has 67 members in the 176-member Andhra Pradesh
assembly and won nine seats in the Lok Sabha elections of 2014.

Telugu Desam Party (TDP)
 State: Andhra Pradesh

 Likely association in 2019: Uncertain, broke from NDA recently
Telugu Desam Party (TDP) is a regional political party in the southern Indian state
of Andhra Pradesh. The party was founded by Nandamuri Taraka Rama Rao (NTR)
on 29 March 1982. Since 1995, the party is headed by Nara Chandrababu Naidu,
the incumbent Chief Minister of Andhra Pradesh.
TDP won 103 of 176 seats in Andhra Pradesh and formed the current state
government. On 16 March 2018, TDP, led by its leader, Chandrababu Naidu,
Chandrababu Naidu
walked out of PM Narendra Modi’s coalition over financial support for Andhra
Pradesh.
Nationalist Congress Party (NCP)
 State: Maharashtra
The Nationalist Congress Party (NCP) is a political party primarily based in the
state of Maharashtra, India. The NCP was formed on 25 May 1999, by Sharad
Pawar, PA Sangma and Tariq Anwar after they were expelled from the Indian
National Congress (INC) on 20 May 1999, for disputing the right of Sonia Gandhi
to lead the party. It currently holds 41 seats in the Legislative Assembly of
Maharashtra.
Sharad Pawar
Rashtriya Janata Dal (RJD)
 State: Bihar
The Rashtriya Janata Dal (RJD) is a political party based in the state of Bihar. The
party was founded in 1997 by Lalu Prasad Yadav. The party was formed after
breaking away from Janata Dal in 1997. It was part of the third-front government
and also of the UPA-1 and 2 governments. The key leader Lalu Yadav is currently
serving a prison term on a corruption charge. The mass base of the party has
traditionally been Yadavs and Muslims, two large and relatively politically active
Lalu Yadav segments of Bihar's population.

Appendix 2: BJP state elections performance

Performance of BJP in state elections since the 2014 general elections
State Date Previous Current Total Vote Total % of Comments
government government seats share seats
Andhra Apr-14 BJP alliance Non-BJP 9 4.1 294 3.1 BJP alliance partner formed government, but
Pradesh alliance ended in 2018.
Arunachal Apr-14 Non-BJP BJP 11 31.0 60 18.3 BJP formed government after break-up in Congress
Pradesh ranks.
Orissa Apr-14 Non-BJP Non-BJP 10 18.0 147 6.8 Regional player BJD in power.
Sikkim Apr-14 Non-BJP BJP partner 0 0.7 32 0.0 Winner SDF has allied with BJP.
Haryana Oct 14 Non-BJP BJP 47 33.2 90 52.2 BJP government on its own.
Maharashtra Oct-14 Non-BJP BJP+ 122 27.8 288 42.4 BJP in post poll alliance with Shiv Sena.
Jammu & Dec 14 Non-BJP President's 25 23.0 87 28.7 BJP was in power with PDP until Jun-18, but
Kashmir rule alliance ended, now there is President's rule.
Jharkhand Dec-14 Non-BJP BJP 37 31.3 81 45.7 BJP in power on its own.
Delhi Feb-15 Non-BJP Non-BJP 3 32.2 70 4.3 AAP in power.
Kerala May-15 Non-BJP Non-BJP 1 10.5 140 0.7 BJP continues to be a fringe player.
Bihar Nov-15 Non-BJP BJP 53 24.4 243 21.8 BJP lost against a combined opposition but was
able to ally with JD(U) which broke away from the
opposition alliance.
Assam Apr-16 Non-BJP BJP 60 29.5 126 47.6 BJP formed government with a local ally. Came to
power for the first time in the state.
Pondicherry May-16 Non-BJP Non-BJP 0 2.4 30 0.0 Congress in power.
Tamil Nadu May-16 Non-BJP Non-BJP 0 2.8 232 0.0 BJP has scant presence.
West Bengal May-16 Non-BJP Non-BJP 3 10.2 294 1.0 BJP has limited presence.
Goa Feb-17 BJP BJP+ 13 32.5 40 32.5 BJP came back to power with post-poll alliance.
Congress was the single largest party.
Punjab Feb-17 BJP alliance Non-BJP 3 5.4 117 2.6 Congress in power.
Uttarakhand Feb-17 Non-BJP BJP 56 46.5 69 81.2 BJP prevailed in this two party state with Congress
being the other party.
Manipur Mar 17 Non-BJP BJP+ 21 36.3 60 35.0 BJP came to power with post-poll alliance.
Uttar Pradesh Mar-17 Non-BJP BJP 312 39.7 403 77.4 BJP came to power with three-fourth majority.
Himachal Nov-17 Non-BJP BJP 44 48.8 68 64.7 BJP gained power from Congress.
Pradesh
Gujarat Dec-17 BJP BJP 99 49.1 182 54.4 BJP retained the state with a reduced majority.
Meghalaya Feb-18 Non-BJP BJP+ 2 9.6 59 3.4 BJP supported allies in power.
Nagaland Feb-18 Non-BJP BJP+ 12 15.3 60 20.0 BJP alliance in power.
Tripura Mar-18 Non-BJP BJP 35 43.6 59 59.3 BJP snapped power from Communist Party which
was in power for more than two decades.
Karnataka May-18 Non-BJP Non-BJP 104 36.2 224 46.4 BJP fell just short of majority; Congress-JDS
formed government in a post-poll alliance.
Note: Highlighted in blue are states were BJP+ wrested power from opposition. Source: Election Commission, CLSA

Appendix 3: India’s governments

India’s governments
Governments Lasted full terms

Unstable governments Year of Total Congress BJP¹
of India Gov’t change by demise election seats seats seats
Narendra Modi 2014 543 44 282

May 2014 to date
Manmohan Singh 2009 543 208 116

Jun 2009 to May 2014
Manmohan Singh 2004 543 145 138

May 2004 to May 2009
Atal Bihari Vajpayee
Mar 1998 to May 2004 1999 543 114 182
I K Gujral
Apr 1997 to Nov 1997 1998 543 141 179
H D Deve Gowda
Jun 1996 to Apr 1997
Atal Bihari Vajpayee

May 1996 to Jun 1996 1996 543 140 161
P V Narasimha Rao
Jun 1991 to May 1996 1991 543 232 120
Chandra Shekhar
Nov 1990 to Jun 1991
V P Singh
Dec 1989 to Nov 1990 1989 543 197 86
Rajiv Gandhi 1984 542 415 2

Oct 1984 to Dec 1989
Indira Gandhi
Jan 1980 to Oct 1984 1980 542 353 -
Charan Singh
Jul 1979 to Jan 1980
Morarji Desai
Mar 1977 to Jul 1979 1977 542 154 295
Indira Gandhi
Jan 1966 to Mar 1977 1971 518 352 22
Lal Bahadur Shastri

Jun 1964 to Jan 1966 1967 520 283 35
i Gulzari Lal Nanda 1962 494 361 14

Interim:
May 1964 to Jun 1964 & Jan 1966
1957 494 371 4
Jawaharlal Nehru
Aug 1947 to May 1964 1952 489 364 3
¹ Bharatiya Janata Party and Jan Sangh before 1977; 1977 the united opposition was Janata Dal. Source: CLSA

Important disclosures India strategy
Companies mentioned
Accenture (N-R)
Bharat Fin Inclusion (N-R)
Coal India (COAL IS - RS291.4 - BUY)
Cognizant Tech (N-R)
Dabur (DABUR IS - RS436.0 - BUY)
Deccan Chronicle (N-R)
Deutsche Bank (N-R)
Facebook (N-R)
Gail (GAIL IB - RS378.2 - BUY)
Godrej Group (N-R)
Godrej Prop (GPL IB - RS711.4 - BUY)
HDFC (HDFC IB - RS1,975.6 - BUY)
HDFC Bank (HDFCB IB - RS2,094.8 - BUY)
Hindustan Unilever (HUVR IB - RS1,752.4 - O-PF)
IL&FS (N-R)
Indian Oil (IOCL IB - RS157.8 - SELL)
IndusInd Bank (IIB IS - RS1,999.8 - BUY)
Infosys (INFO IB - RS1,360.8 - BUY)
ITC (ITC IB - RS301.6 - BUY)
Mahindra (MM IB - RS933.0 - BUY)
Mahindra Vehicle Manufacturers (N-R)
Maruti Suzuki (MSIL IB - RS9,202.0 - BUY)
Nestle (N-R)
Patanjali Ayurved (N-R)
Royal Bank of Scotland (N-R)
Sun Pharma (SUNP IB - RS635.2 - BUY)
Taro Pharmaceutical Industries (N-R)
Tata Consultancy (TCS IB - RS2,013.7 - BUY)
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Special report Summer 2018

Mahesh Nandurkar Contents

Abhinav Sinha BJP’s game plan .............................................................................................................. 4

Market impact ............................................................................................................... 63

The known world . . .

2 mahesh.nandurkar@clsa.com 23 August 2018

Valuations of preferred stocks

23 August 2018 mahesh.nandurkar@clsa.com 3

BJP’s game plan

Modi remains popular but a repeat of 2014 unlikely

4 mahesh.nandurkar@clsa.com 23 August 2018

The BJP’s power has spread wider . . .

23 August 2018 mahesh.nandurkar@clsa.com 5

Jammu & Kashmir Jammu & Kashmir

Himachal States ruled by BJP/ally Himachal States ruled by BJP/ally

Uttar Pradesh Uttar Pradesh

Tamil Nadu Tamil Nadu

6 mahesh.nandurkar@clsa.com 23 August 2018

Unprecedented win in Uttar Pradesh

Trends in the share of seats and votes (Uttar Pradesh)

The rise of anti-incumbency . . .

BJP’s key reverses

23 August 2018 mahesh.nandurkar@clsa.com 7

. . . as some reforms have a near-term economic cost

Reforms hit large sections Reforms driving anti-incumbency

Substantial simplification of indirect taxes; boost to

Bankruptcy Resolution of corporate bankruptcies by creating a Banks, capital

Demonetisation Reducing cash transactions/black money Rural/

Inflation-targeting framework adoption: Not to everyone’s benefit

8 mahesh.nandurkar@clsa.com 23 August 2018

The ups and downs of Modi’s tenure

10,000 BJP wins UP

Section 1: BJP’s game plan

FY15 FY16 FY17 FY18 FY19

Source: CLSA, Bloomberg

CPI has stayed within the CPI trend

Source: CLSA, MOSPI, RBI

10 mahesh.nandurkar@clsa.com 23 August 2018

Rural wage growth Residential property prices in top-seven* cities

The GST transformation: Small businesses face disruption

Declining garment exports, The trend in readymade garment exports

Source: CLSA, Ministry of commerce

The Insolvency and Bankruptcy code: Old order destabilised

23 August 2018 mahesh.nandurkar@clsa.com 11

IBC process adoption led to Banks’ gross NPL ratio

Weak capex cycle India’s GFCF as % of GDP

Source: CLSA, MOSPI

12 mahesh.nandurkar@clsa.com 23 August 2018

Parliamentary efficiency improved under BJP rule

100 Nirav Modi, AP/TN

BJP's clear majority in

23 August 2018 mahesh.nandurkar@clsa.com 13

Real Estate Regulatory Act: Bringing order to chaos

Real estate launches are Residential units launched in top-seven cities¹

Demonetisation: Much ado about nothing

14 mahesh.nandurkar@clsa.com 23 August 2018

BJP unlikely to get a majority on its own

Likely scenario for BJP in the 2019 election

States with weak

Source: CLSA, Government of India

We analyse next year’s election based on three kinds of region/states, in terms of

23 August 2018 mahesh.nandurkar@clsa.com 15

Segregation of states (based on BJP presence and competition)