The Next India: Opportunities and challenges

A steady pace of implementation of policy reforms can lay foundation of India's read GDP at an average of 6.75%, and the economy would pass the $5 trillion mark over the next 10 years, says Morgan Stanley

The effects of corrective policy measures in India during the past 12 months in the form of adjustments in the real effective exchange rate and real interest rates, and steps to improve the business environment alongside the steady improvement in the external environment, are beginning to show in improving macro stability indicators. Stock markets have responded as well, and there is growing evidence that the market believes in a new growth cycle – the most pertinent signal being the widening gap between bond and equity yields, says Morgan Stanley in a research note.


Morgan Stanley said, it believes that India’s medium-term growth trend will be supported by the inter-play of the structurally positive factors of demographics like strong growth in the working age population, reforms that can help improve productivity and globalisation accelerating productive job opportunities, income and saving. "In the coming 12 months, as policy makers focus on maintaining improvement in macro stability indicators, particularly inflation, we believe that the growth recovery will remain somewhat slow."


"However," the report says, "we believe the cumulative impact of sustained policy measures to improve investment sentiment for domestic and foreign entrepreneurs will begin to support a more meaningful acceleration in gross domestic product (GDP) growth from FY2016 onwards. This will likely lead to a new profit cycle in FY2016, as well as a greater appetite for equities among domestic investors. We believe that domestic households could end up buying in excess of $230 billion of stocks by FY2025, as compared to $40 billion in the past 10 years."

Source: Morgan Stanley


According to Morgan Stanley, two key variables that will be critical in reviving India’s growth trend are improvement in the external environment and a pick up in the pace of structural reforms. The global economics team at Morgan Stanley expects global growth to improve further to 3.7% in 2015, moving closer to the last 30 years’ average, giving it the confidence that the external environment will be supportive of India’s growth recovery.


However, policy reforms at home would be even more critical, the report cautions. Over the past five years, the Indian government’s policy was focused more on redistribution and less on boosting productive income growth. Moreover, bureaucratic hurdles and corruption-related investigations have exacerbated the challenges of weak demand and low corporate confidence. This has held back the much needed capex cycle and has been a drag on economic growth, it added.


The reports says, overhauling bureaucratic processes and enacting reforms to lift sustainable growth is imperative. It says, "The macro stability risks of higher inflation, a wide current account deficit and asset quality issues in the banking system associated with such a policy approach has forced a recognition among policy makers of the need to pay greater attention to reviving the productive dynamic."


Morgan Stanley feels that to generate productive employment opportunities for India’s large and growing working age population, higher economic growth rates are needed. Moreover, India’s literate and well-connected middle class is now reaching critical mass, it added.

According to the report, India’s relatively lower Gini coefficient as compared with other large emerging market economies indicates that the fruits of higher income growth have been shared relatively evenly across a larger segment of the population and, hence, have supported the rise of the middle class. "As we have seen in other major Asian economies, this middle class will demand greater accountability of policy makers to deliver on reforms that revive the virtuous dynamic of productive jobs – income growth – savings – investment," the report said.


In its base case, Morgan Stanley expects a steady pace of implementation of policy reforms, which will lay the foundations for India’s real GDP growth to move higher to an average of 6.75% over the next 10 years. It said, "If our projections were to come to fruition, India’s economy would pass the $5 trillion dollar mark, a feat that has been achieved by only the US and China thus far and would make India the fifth-largest economy from 10th currently in the world. Accordingly, India’s consumption and investment opportunities would rise to 3.6 trillion and $1.9 trillion, respectively."

Morgan Stanley feels India's strong macro story also means money-making opportunities for stock market investors. According to the research note, there are three themes for this...

1) the macro story leading to the next profit boom – Morgan Stanley said it expect profit growth to average 14.6% over the coming decade

2) the drivers for the rising household ownership of equities, given that equities could compound between 12% and 15% over the coming decade in local currency terms; and, ultimately,

3) India will remain a portfolio manager's delight because of its intense stock-picking characteristics and, ultimately, how all this translates into stock market returns, which will likely make India one of the biggest equity markets in the world.

However, Morgan Stanley cautions about the challenges and risk in the journey towards $5 trillion GDP and $4 trillion market cap. It says, "We see three reasons why this is the case. First, while we have assumed that the global growth environment will be benign and supportive for India, there remain considerable risks to this outlook, as the advanced economies will still have to deal with the challenges associated with de-leveraging, while the emerging markets will have to contend with the challenges associated with a change in their growth models. Second, closer to home, implementing the needed reforms will require a stable political environment that is geared towards providing a reformist push to achieve sustainable higher growth rates. Third, the list of reforms is long and, in some cases, will be difficult to implement in a timely fashion, as consensus will need to be built and vested interests overcome. Overhauling bureaucratic processes and installing transparent mechanisms for allocation of resources and projects, which is critical for kick-starting the capex cycle and infrastructure development, will also be a time-consuming endeavour."

"In addition, there are specific risks to equity returns, including a shrinking free float for foreign investors, evolving corporate governance standards, acute dependence on foreign capital, which causes extreme stock market volatility, and negative real rates," Morgan Stanley added.


Cipla invests $1.5 million for 14.6% stake in Chase Pharmaceuticals

The  $21  million  two-phase  financing  from Cipla will  support  Phase  2a and  Phase  2b clinical  trials  for Chase’s lead drug CPC201

Cipla Ltd said it invested $1.5 million for buying a 14.6% stake in US-based Chase Pharmaceuticals Corp. The investment will be done through Cipla's UK subsidiary Cipla (EU) Ltd.

In a regulatory filing, the pharmaceutical company said, Chase has a unique patented approach and is focused on improving the efficacy, safety and tolerability of existing Alzheimer medications.

The  $21  million  two-phase  financing  will  support  Phase  2a and  Phase  2b clinical  trials  for Chase’s lead drug CPC201. The original venture funding for Chase was provided by the Brain Trust Accelerator Fund in 2010, Cipla said in the filing.

“This investment is consistent with Cipla New Ventures’ mission to build more innovation-led business streams for Cipla in the future. We want to bring affordable medicines, where we identify an unmet patient need, in a way that leverages Cipla’s formidable technology, device and development capabilities, ” Subhanu Saxena, managing director and global chief executive of Cipla said.

In  India,  over  5  million  patients  suffer  from  dementia,  most  of  whom  are  afflicted  with Alzheimer’s. These numbers are expected to double by 2030. In India, the caregiver  is the family and  the  economic  and  social  impact  is  far  reaching.  In  North America,  Alzheimer’s disease affects more than over 7 million patients and its impact is growing as the population ages.  The  disease  costs  the  US  alone  $203  billion  annually  with  projections  to  reach  $1.2 trillion by 2050.

Cipla said, in addition to financing Chase, it will collaborate with the company to develop the drug. If successful, Cipla may provide low cost access to Chase’s lead drug in India and South Africa, the company added.

Cipla closed Monday 1.3% up at Rs387 on the BSE while the 30-share Sensex ended the day 2.2% higher at 23,494.


Andhra Bank FY14 net profit tumbles 66% to Rs436 crore

For FY14, Andhra Bank reported fall in its net profit to Rs436 crore due to 2.3 times higher provisions and increasing NPAs

Andhra Bank Ltd
reported lower net profit in FY2013-14 due to increasing non-performing assets (NPA) and provisions.

For the 12 month to end-March, the public sector lender said its net profit fell 66% to Rs436 crore from Rs1,289 crore, even as its total revenues, including interest income, grew 12% to Rs15,630 crore from Rs13,957 crore, a year ago period.

During FY14, Andhra Bank said its net interest margin (NIM) stood at 2.65% compared with 2.76% a year ago period, while its other income grew 27.3% to Rs1,333 crore.

During FY14, the lender made a provision of Rs2,026.51 crore, 2.3 times (103% more) higher from Rs996.16 crore, a year ago period. Its provisions coverage ratio stands at 52.55% as on 31 March 2014. It also made provision of Rs99.75 crore for pending settlement of the proposed wage revision effective from November 2012.

As on 31 March 2014, Andhra Bank's gross non performing assets (GNPA) increased 58% to Rs5,857.60 crore from Rs3714.49 crore while its GNPA ratio stood at 5.29% from 3.71% a year ago. Its net NPA increased 39% to Rs3,342.47 from Rs2,409.17 crore, while is NPA ratio stood at 3.11% from 2.45% a year ago period.

As on 31 March 2014, total advances of Andhra Bank increased 10.5% to Rs1.10 lakh crore while Andhra Bank's deposits during the year increased 14.6% to Rs1.41 lakh crore compared with same period a year ago.

Andhra Bank's current account saving account (CASA) deposit grew 10.8% to Rs35,186 crore as on 31 March 2014. Its CASA share in total deposit stands at 24.8%. Andhra Bank's capital adequacy ratio (CAR) stood at 10.78%.

For the quarter to end-March, Andhra Bank said its net profit fell 74% to Rs88 crore from Rs344 crore, while its total revenues including interest income grew 9% to Rs4,058 crore from Rs3,713 crore, same period last year.

During December quarter, Government of India has subscribed to 3 crore shares of Andhra Bank having face value of Rs10 each at premium of Rs56.59 per share aggregating to Rs200 crore through preferential allotment. As a result government (promoters) shareholding in Andhra Bank increased to 60.14% from 56% a year ago period.

Andhra Bank has paid an interim dividend of Rs1.10 per share during January 2014.

Andhra Bank closed Monday marginally up at Rs65.20 on the BSE, while the 30-share Sensex ended the day 2.2% higher at 23,494.

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