INDIA DAILY November 1, 2012 India 31-Oct 1-day1-mo 3-mo Sensex 18,505 0.4 (1.7) 7.2 Nifty 5,620 0.4 (1.7) 7.2 Contents Global/Regional indices Special Reports Dow Jones 13,096 (0.1) (3.1) 1.0 Nasdaq Composite 2,977 (0.4) (4.4) 2.0 Strategy FTSE 5,783 (1.1) (0.6) 1.2 Strategy: Is it really difficult doing business in India? Nikkie 8,882 (0.5) 1.0 2.8 Hang Seng 21,609 (0.2) 3.7 9.0 Daily Alerts KOSPI 1,889 (1.2) (5.4) 0.5 Results Value traded – India Cash (NSE+BSE) 118 151 133 NHPC: Low realizations, high tax incidence Derivatives (NSE) 869 898 1,137 Titan Industries: Mix improvement pays off Deri. open interest 1,251 1,179 1,128 Glenmark Pharmaceuticals: Strong quarter but limited margin of safety Tata Global Beverages: Mixed results Forex/money market Change, basis points Thermax: Near-term outlook slightly clouded, especially on margins 31-Oct 1-day 1-mo 3-mo Rs/US$ 53.9 9 147 (187) Bharat Forge: Revenue growth remains under pressure 10yr govt bond, % 8.3 2 (5) (2) Net investment (US$mn) J&K Bank: Clears an important event with limited concern 30-Oct MTD CYTD FIIs (29) - 18,051 Gujarat Pipavav Port: Weak volume on market-share loss; cautious on MFs (7) - (282) near/medium-term trajectory Top movers -3mo basis Change, % Best performers 31-Oct 1-day 1-mo 3-mo UNSP IN Equity 1175.8 2.7 (5.1) 46.4 FTECH IN Equity 995.3 1.3 2.4 35.0 MSIL IN Equity 1437.9 3.4 5.9 27.7 MM IN Equity 884.5 1.2 2.4 26.5 UTCEM IN Equity 1996.2 (0.8) (0.9) 21.8 Worst performers SUEL IN Equity 15.8 0.0 (12.0) (15.1) GMRI IN Equity 20.1 (0.5) (19.2) (14.1) NACL IN Equity 46.9 0.0 (7.3) (13.6) HPCL IN Equity 298.7 0.3 (4.2) (11.6) IVRC IN Equity 39.8 (0.4) (18.0) (10.5) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. Strategy.dot INDIA Strategy GameChanger Perspectives OCTOBER 31, 2012 NEW RELEASE BSE-30: 18,505 Is it really difficult doing business in India? GameChanger Perspectives deep-dives into data that bring much opprobrium to India: India is a very difficult place to conduct business in. The authoritative source of this data is the World Bank’s Doing Business Report. India’s rank in the most recent report (2013) is 132nd out of 185 economies (same as in 2012) which means India is near the lowest quartile of countries. The advantage of numerical data is that a policymaker can work on measurable metrics, and over time, improve scores and ranking. GameChanger Perspectives looked into the data that go into defining the ranks in these aspects to get a policy prescription – but returned with mixed conclusions. QUICK FACTS Rank bad... • India’s contract The report measures the ease (or otherwise) of doing business by comparing countries across 10 enforcement has parameters. They are broken into more granular questions that have a numerical answer/data improved point, such as time taken, procedures involved and costs of doing business, so that the data can meaningfully over be compared across countries. For cost of doing business the report does not consider an absolute the last decade number (which would make it incomparable across countries) but costs as a proportion of per capita income in respective countries. The countries are then ranked on a weighted average score • India’s tax reforms to arrive at a rank for a dimension, which is then consolidated into an overall ranking. have been In seven of the 10 dimensions of Doing Business that the report tabulates, India has a rank of meaningful – move greater than 100 (see Exhibit 1). Of these, India is worst in (1) enforcing contracts, (2) dealing with to GST should construction permits, (3) starting a business and (4) paying taxes. propel India to higher rankings …or not that bad? ` In the case of “enforcing contracts”, the data seem not to have been updated over the past nine years (see here, here). According to the data, India takes 1,420 days to enforce contracts. What is measured across countries is this: “The dispute involves the breach of a sales contract worth twice the income per capita of the economy. The case study assumes that the court hears arguments on the merits and that an expert provides an opinion on the quality of the goods in dispute. This distinguishes the case from simple debt enforcement. The time, cost and procedures are measured from the perspective of an entrepreneur (the plaintiff) pursuing standardized case through local courts.” To see whether India has improved in this aspect, GameChanger Perspectives looked at the Consumer Court system in India, which typically looks into the kind of disputes mentioned above. Exhibit 2 suggests that over the past decade, India has dramatically cut the time it takes to enforce contracts. If other countries have achieved similar gains, India’s relative ranking does deserve the second-last position. However, figures of the 2013 study show that India’s reduced time taken to enforce contracts is the same as that Canada, ranked 62nd, took in 2004 as well as currently. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. India Strategy ` “Dealing with construction permits” gives a significant (one-third) weight to the cost (of building a stylized warehouse), the other two aspects being time and procedures involved. India’s rank slips significantly due to the cost of permits and what causes the cost to zoom is the high fees required to be paid to obtain a completion certificate (CC). Of the total cost of Rs1.09 mn, the CC fee amounts to Rs0.84 mn (for a 14,000 sq. foot warehouse). The fee is low as a proportion of the cost of the land (fee of Rs200 per sq. meter; land price at the fringes of Mumbai would be about Rs100,000 per sq. meter) and building (Rs500 per sq. meter as fees for about Rs15,000 per sq. meter for construction). However, standardizing this number as a proportion of per capita income penalizes a poorer country like India with a lower per capita income far more than it does a rich country. Besides, in the case of procedures, India’s rank drops because it has, for example, this three-step process (out of 34 steps in India it seems): Apply for an NOC from the Tree Authority; submit to inspection from the Tree Authority; and obtain NOC from the Tree Authority. In cases of some other countries (for example, the UK), far more complicated procedures are lumped together. The learning is that many of the procedures are done through a “single window” and that seems to help to get a better rank in this report. ` In “starting a business”, four factors carry equal weight: time, procedures, cost and paid- in minimum capital. In India, minimum capital has been raised to Rs100,000 to prevent frivolous companies from being formed. Countries that dispense with this notion of minimum paid-up capital score high here. The question to ask possibly is whether the most appropriate form of organization for poorer countries is a limited liability corporation or whether proprietorship/partnership would suffice (for which there are no minimum paid-up capital requirements in India). Again, India can reduce procedures here significantly (though over time the MCA has become significantly e-enabled). ` “Paying taxes” takes into account three variables, all weighted equally: tax rates, time to file and number of payments a year. Data in the report states that in India, of the 243 hours it takes annually to file tax returns, 105 hours go in filing central sales tax returns (CST). This number possibly needs to be relooked at as (1) the importance and quantum of CST has fallen significantly over the past nine years and (2) the score does not associate any time element with state VAT and CENVAT. The learning for India is that once GST comes in, its rank here can zoom dramatically. Incidentally, the reason the number of payments made is high (33) is because 24 of them relate to monthly ESI and EPF deductions: If these were counted as two, then the number of touch-points for India would fall to 11, the same as the US (which has multiple authorities to deal with). Simple steps to boost India’s rankings GameChanger Perspectives believes India needs to (1) offer its business people more single-window clearances, (2) reduce the cost of interacting with the Government and (3) reduce the number of touch points. Of course, bigger payoffs may also come by better educating the market about changes that India has already worked on over the past decade. We also refer our readers to an earlier GameChanger Perspectives #LXII: Changing face of Government interaction with the Indian public. 2 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India India ranks poorly across a variety of dimensions of doing business Rank of India in a group of 185 countries, years refer to the edition of the report 2013 2012 Starting a business 173 169 Dealing with construction permits 182 183 Getting electricity 105 99 Registering property 94 97 Getting credit 23 23 Protecting investors 49 46 Paying taxes 152 149 Trading across borders 127 125 Enforcing contracts 184 184 Resolving insolvency 116 109 Source: World Bank's Doing Business Report of respective years India has improved significantly in dispensing justice Various facets of cases in consumer courts in India, March fiscal year-ends, 2003-11 2010-11 2003-05 Cases outstanding at the end of the period (a) 354,319 359,469 Cases disposed off in last one year (b) 226,534 93,727 Time required to clear outstanding cases (days, a/b*365) 571 1,400 Source: Ministry of Consumer Affairs, KIE calculations KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 BUY NHPC (NHPC) Utilities OCTOBER 31, 2012 RESULT Coverage view: Attractive Low realizations, high tax incidence.