Indian Jewellery Demand in 2013: Can it Withstand the Challenges

Ahead?

Shekhar Bhandari

Executive Vice President, Kotak Mahindra Bank

Email: shekhar.bhandari@kotak.com

13th November 2012

2

India’s GOLD Values (1900 BC)

3

India’s GOLD Values

Built over 4000+ years

Habits do not change in 15-25 years…takes much longer ….process of evolution

Gold is Connotation for

Prosperity : “Sone ki Chidiya”

Social Security : “Stri Dhan”

Safety : At all times “Swarna”

Liquidity : “Most Secured Currency”

Returns : Consistent over 10 years

Versatile : For Good times “pleasure” and for bad times “security”

4

Culture and Habits

Affected by Changes with

Economy

Evolution

Education

Religion and

Government Policy

Key demand points on Jewellery in short run are :

Marriage

Monsoon and Harvest

Government Policy

5

India’s GOLD Values (1600 AD)

THE OPPORTUNITY

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

-

300

600

900

1,200

1,500

2010 2012 2014 2016 2018 2020 2022 2024

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000Currency Deposits Shares and debentures

Claims on government Insurance funds Pension funds

GDP (RHS)

US$10 TN Opportunity – WIN-WIN all the way

India’s nominal GDP to spiral to US$7 tn by 2025E, cumulative savings flow to touch US$10 tn Projected nominal GDP (at current exchange rates) and saving inflows across products, March fiscal year-ends, 2010-25E (US$ bn)

Source: Bloomberg, Company, Kotak Institutional Equities estimates

US$10 TN Opportunity – WIN-WIN all the way

• Financial services sector to present a US$10 tn opportunity

• Opportunity to emerge from favorable demographics, economic growth and progressive regulatory trends.

Game Changers

• Physical savings (housing, gold*) will remain strong, while financial savings remain a big component of overall household savings with growing financial inclusion.

India is likely to continue to be an economy of savers, like its Asian counterparts

• The biggest trends over the next 15 years will be increased financial inclusion (driven by government programs mandating banking channel usage), technological improvements reducing the need for physical cash holding by citizens, mobile banking and reduced transaction costs.

The big trends: Inclusion, technology, efficient distribution

• Macro growth will continue steadily.

• Treat growth as an exogenous variable and model it as a given.

• Any setback to growth would have a proportionate impact on the opportunity size.

Continued economic growth

* In Indian GDP Data Gold is classified as Investments and not Physical Savings

Key Changers

• As people move into the ‘productive ages’ of 20-59, they save more. The Life Cycle theory of savings suggests that the peak of savings occurs during the late 30s-end 50s. This would indicate that 88% of India’s population will be less than 60 years old by 2025E. We expect the household savings rate to go up to 18.9% in 2025E.

Changing demographics

• Nominal GDP growth expected at 12.3% pa, GDP per capita is expected to increase to US$5,000 in 2025E. Increased income translates into higher savings (financial as and Physical) as the marginal propensity to consume declines

Increasing income

• We expect India to have c1,200 mn bank accounts and c55 mn demat accounts in 2025E, We expect 170 mn life insurance policies in force, Tier III and Tier IV wealth still remains far from being tapped. Gold becomes natural asset class being widely distributed and consumed in Rural India.

Geography and Financial inclusion – not enough

• Sticky Inflation in India could lead to sustained demand for Gold. In an atmosphere where real income is safeguarded ,consumption rising and other asset classes having negative real returns – Gold stands out

Inflation and Real Returns

• Gold is classified as secured risk free asset. Compared to other forms of financial assets and present volatile world, Gold becomes natural asset class to choose from

The Volatile World

Changing Demographics – To increase saving rate

0

20

40

60

80

100

0-4

5-9

10-1

4

15-1

9

20-2

4

25-2

9

30-3

4

35-3

9

40-4

4

45-4

9

50-5

4

55-5

9

60-6

4

65-6

9

70-7

4

75-7

9

80+

88% of India’s population to be less than 60 years old by 2025E

India’s age profile in 2025E (% of population)

Source: Kotak Institutional Equities estimates

Changing Demographics – To increase saving rate

Life Cycle Theory of Savings suggests increased savings in the ‘productive’ age range

Example showing saving pattern for a typical person across his/her age (indexed)

Source: Kotak Institutional Equities estimates

(2,000)

-

2,000

4,000

6,000

- 10 20 30 40 50 60 70 80

Increasing Income – To raise quanta of savings

-

1,500

3,000

4,500

6,000

7,500

2010 2012 2014 2016 2018 2020 2022 2024

-

1,600

3,200

4,800

6,400GDP per capita (USD) GDP (RHS) Population (mn)

Increasing GDP and slowing population growth will lead to higher per capita incomes Projected nominal GDP, population and per-capita income, March fiscal year-ends, 2010-25E (US$ tn)

Source: Kotak Institutional Equities estimates

Increasing Income – To raise quanta of savings

Household savings rate to go up over time Household savings rate, March fiscal year-end, 2010-2025 (% of GDP)

Source: Kotak Institutional Equities estimates

14.00%

14.50%

15.00%

15.50%

16.00%

16.50%

17.00%

17.50%

18.00%

18.50%

19.00%

19.50%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Household Saving Rate

14

India’s GOLD Values (1900 AD)

MYTHS

5 MYTHS

Illiterate/ Unaware and

do not understand

Educated do not buy Gold

Only Women buy Gold

Compromise on Quality

Price Sensitive

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

17

Real returns from bank deposits have witnessed volatility…

Source: CEIC, Bloomberg, Kotak Mahindra Bank

(11)

(9)

(7)

(5)

(3)

(1)

1

3

5

7

9

11

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Real deposit rate (CPI based) Real deposit rate (WPI based)%

18

…and share of physical savings(ex Gold) have risen significantly

Source: CEIC, Kotak Mahindra Bank

0

2

4

6

8

10

12

14

16

18

20

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Gross Domestic Saving: Household: Physical Savings (India)

Gross Domestic Saving: Household: Financial Savings (India)

Gross Domestic Saving: Household (India)

% of GDP

19

Negative returns in equity market driving investors to other avenues

Source: CEIC, Bloomberg, Kotak Mahindra Bank

(80)

(60)

(40)

(20)

0

20

40

60

80

100

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

Real return on SENSEX (WPI based) (LHS)

Real deposit rate (WPI based) (RHS)% %

20

Both MF and insurance industry are finding it difficult to attract household savings

Source: AMFI, IRDA

AUMs of Indian MFs (end-March)

0

100000

200000

300000

400000

500000

600000

700000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(40)

0

40

80

120

Equity LHS Debt (LHS)

yoy (RHS)

%Rs cr

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

LIC Private playersRs cr

21

Hence, gold has a big attraction

Source: CEIC, Kotak Mahindra Bank

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

5

10

15

20

25

30

35

40

45Volume of gold imports (tons, LHS) Value of gold imports (US$ bn, RHS)Real return on Gold (CPI based) %

(40)

(20)

0

20

40

60

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Real return on Gold (CPI based) %

22

2013

23

2013 : Auspicious Days

0

5

10

15

20

25

Jan Feb Mar April May June July Aug Sep Oct Nov Dec

2012

2013

23% more wedding days 24% more marriages No Hindu wedding dates for four month i.e Chaturmas (148 days lost in 2012 vis a vis 117 in 2013) Chaturmas : period when Lord Vishnu, and his fellow Gods and Goddesses, are believed to be in Yogi Sleep for the four months. Hindu weddings are not held so that the Gods are not disturbed.

Source: Kotak Mahindra Bank, Lunar Calender

Monsoon and Harvest

Monsoon/harvest has direct correlation to demand for Gold Government action in January ’12 and March ’12 having a bearing on demand for gold 2013 expected to be good Monsoon year

(80)

(60)

(40)

(20)

0

20

40

60

80

100

120

Nov-

07

Feb-0

8

May-

08

Aug-0

8

Nov-

08

Feb-0

9

May-

09

Aug-0

9

Nov-

09

Feb-1

0

May-

10

Aug-1

0

Nov-

10

Feb-1

1

May-

11

Aug-1

1

Nov-

11

Feb-1

2

(100)

0

100

200

300

400

500

600

700

800Rainfall (surplus/deficient, %, LHS)) Gold imports growth (y/y %, RHS, 6M lag)

Is gold demand purely on account of Culture and Habits? Did the government contain gold demand by increasing duties ? Should growth aspirations be moderated in the context of the current volatile

political and social circumstances? In the new global context, should we aspire for a higher gold consumption? Will India and China make gold unaffordable for the commoner?

Many questions….and Policy Direction

26

2013 : Indian Jewellery

23% more number of Auspicious days

24% more Marriages

Normal monsoon/harvest conditions

Government to push Financial Savings

2014 is an election year

25% growth over 2012

Happy Diwali

www.kotak.com

Disclaimer

• In the preparation of the material contained in this document, Kotak Mahindra Bank Ltd. (Kotak Bank), has used information that is publicly available, including information developed inhouse. Some of the material used in the document may have been obtained from members/persons other than the Kotak Bank and/or its affiliates and which may have been made available to Kotak Bank and/or its affiliates. Information gathered & material used in this document is believed to be from reliable sources. Kotak Bank however does not warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material no such party will assume any liability for the same. Kotak Bank and/or any affiliate of Kotak Bank does not in any way through this material solicit any offer for purchase, sale or any financial transaction/commodities/products of any financial instrument dealt in this material. All recipients of this material should before dealing and or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice.

• We have included statements/opinions/recommendations in this document which contain words or phrases such as "will", "expect" "should" and similar expressions or variations of such expressions, that are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements due to risks or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in India and globally, changes in domestic and foreign laws, regulations and taxes and changes in competition in the industry. By their nature, certain market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses could materially differ from those that have been estimated.

• Kotak Bank (including its affiliates) and any of its officers directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/ are liable for any decision taken on the basis of this material. The investments discussed in this material may not be suitable for all investors. Any person subscribing to or investing in any product/financial instruments should do so on the basis of and after verifying the terms attached to such product/financial instrument. Financial products and instruments are subject to market risks and yields may fluctuate depending on various factors affecting capital/debt markets. Please note that past performance of the financial products and instruments does not necessarily indicate the future prospects and performance thereof.

• Such past performance mayor may not be sustained in future. Kotak Bank (including its affiliates) or its officers, directors, personnel and employees, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation in the financial instruments/products/commodities discussed herein or act as advisor or lender/borrower in respect of such securities/financial instruments/products/commodities or have other potential conflict of interest with respect to any recommendation and related information and opinions. The said persons may have acted upon and/or in a manner contradictory with the information contained here. No part of this material may be duplicated in whole or in part in any form and or redistributed without the prior written consent of Kotak Bank. This material is strictly confidential to the recipient and should not be reproduced or disseminated to anyone else.