19 May 2014 FROM THE CEO s DESK Dear Mr. Modi, An Open Letter to Mr. Narendra Modi On behalf of the people of India - You sold us a dream we bought it now, let s live it, together! Heartiest Congratulations on your resounding victory. Here s hoping for India to prosper under your leadership! Through the course of this letter I will do my best to enlist what India now expects from you in your tenure as the Prime Minister of this great nation. It is extremely hard to be unbiased, Mr. Modi, when you are very passionate about a subject and are wanting to pen down your thoughts on the same. I kept thinking through the course of the day on Friday, if I were a news editor, what would my headlines be, and for that I had to be sure not to read any newspaper on Saturday morning, lest I get influenced. Some of the headlines that came to my mind were: - Congress: A New Regional Party Born With 44 Seats? - The Start of a Single-party System in India? - Decimation, Annihilation & Vindication! - India Modi Fied! - From An Era of Silence to an Era of India Being Heard There were many more, but the force of your victory was so strong that I think if one decides to think of headlines, a short book could be written on the same. That said, there is no doubt that Ab Ki Baar and yes, if the stock market reaction since August 2013 until Friday is the only tangible benchmark, apart from the millions that have showed up at your rallies, then a 45% rally in the Nifty and Bank Nifty along with a 15% appreciation of the rupee since then (as I am sure, you would have noticed) endorses Ache Din Aa Gaye Hain! You do have a lot of expectations to fulfill and the nation waits with bated breath to see you deliver on your promises. The margin for error, Mr. Modi, I m sure you would appreciate, is very little, given the weight of expectations. Your biggest challenge, according to me, Mr. Modi, is going to be job creation. The one thing that India supplies to itself and the rest of the world in abundance, more than anything else, is - people. And while we do not have a policy that puts a curb on the supply of people (as some other nations in the world do), it is imperative that jobs be created, not by the dozens, not by the hundreds, not by the thousands, but by the millions! I am already seeing in my experience, no such thing as a demographic dividend it is a myth and needs to be busted as on date. It is a demographic curse! And the only way this nation can move forward is for you, Mr. Modi, to be committed to generating productive employment that should be your primary and most important focus in your tenure, according to me there is nothing more dangerous that an unproductive, young workforce, that is currently abundant in this country and the reason for the gloom, and the reason for your mandate. It is one of the biggest promises that you, as the Prime Minister designate, has made, and I am sure you will do all at your command to come good on this promise. In job creation is implied the revival of the domestic economy, Mr. Modi, and to the audience that I cater to professionally, this is paramount.
Mr. Modi, your Gujarat Model has been spoken off a lot as to how Gujarat manages to attract corporate investment, how projects move forward at a rapid face, how its growth rate is higher than most other states in India, how basic amenities are, by and large, provided across the state to most sections of society, and how you take the people, the bureaucracy and the government officials with you en route the road to progress (Vikas, as you ve referred to it in your election rallies). People of this country want to see growth rebound to 8% 9% in your tenure and the revival of the animal spirit, as former Prime Minister Dr. Manmohan Singh called it, in this regard will be tantamount I could confess, pockets of this country have already started assuming this number will be achieved in your tenure the policies that will govern this to be a reality will need to be robust and cast in stone. This model, as it were, is easily applicable at the national level as well. It requires three things effective delegation, empowerment of officials to get the job done and accountability of the responsibility given qualities, it appears you effectively have and is reflected in the people s mandate for you. If what we hear about you, Mr. Modi, is correct, then your man management skills are excellent and this should not be a very difficult task to achieve at a national level. While participants in the Indian stock market expect you to be big on infrastructure (road connectivity, port development, better usage of India s coastline, projects like the Delhi Mumbai Industrial Corridor, and river connectivity among other things), power sector reforms (which would include ensuring raw material availability and financial viability) and professionalizing public sector undertakings (banks and otherwise), the BJP manifesto also spoke about being very upbeat on the tourism sector (to boost brand India s image overseas) and how you plan to rein in the fiscal and current account deficits of this country, given that the latest numbers presented to the country by the outgoing Finance Minister, Mr. P. Chidambaram, were obviously window-dressed. As you might have noticed, the stock market rally that we have witnessed since August 2013 has been dominated by some of these sectors and may continue to do so for the better part of the year monitoring, of course, your promises versus performance. Your views on taxation will also be watched very closely (Goods and Services Tax, Direct Tax Code and your views on retrospective tax issues that were prevalent under the previous United Progressive Alliance regime) and your policies on foreign direct investment (especially retail). In my interactions with my clients since January of this year, Mr. Modi, there was by and large consensus on the hope of you forming the next government at the Centre, which is what I have been documenting in my writings with them, since then, too. Being someone who is perceived to be pro industry and right of centre, I am sure you do keep an eye on the stock markets. While most of the people I interact with did expect the Nifty to head to 7000 on or before the election results and somewhere between 7500 8000 on the verdict that came out in your favour on Friday, it is anyone s guess as to where this market heads from here on, depending on your deliverance of promises. The power of this mandate to you (282 seats for the Bharatiya Janata Party and 335 for the National Democratic Alliance), Mr. Modi, essentially means, I am sure, that you virtually have a free hand in whatever you want to do, and that increases the burden of expectations. Obviously, this means, from a capital market perspective, all eyes will now be on the Budget that the new finance minister under your leadership presents, which participants of the capital market hope, would have a pro-market tilt, while doing its best to appear inclusive and live up to your promise to the Indian electorate regarding inclusive growth (here I can confess, subsidy management would be key). It is very conceivable that this market continues to rally to 8000 on the Nifty, and beyond, Mr. Modi, if most or all the promises made by you are delivered on and if the Budget turns out to be a defining one, like Dr. Manmohan Singh s at the turn of the 1990 s and Mr. Chidambaram s dream Budget that people still remember. You, in the current environment, Mr. Modi, have to take it one step higher, given the burden of expectations.
There is consensus now, Sir, that the following will happen as far as participants and analysts in the stock market are concerned, after your landslide victory: upward revision in GDP growth forecast, upward revision in earnings estimate forecast for corporate India, stronger rupee forecast and all this would be driven by improved sentiment and hope of a revival in domestic capex in manufacturing-intensive sectors, which would mean immense spotlight and scrutiny of your policies on this account sectors such as infrastructure and allied sectors, cement, capital goods, banks have all been having a dream run on the stock markets, Sir, in anticipation of so many things possibly going right under your leadership so much so that this trade, on a lighter note, is now referred to as Modi trade. While this is not stock market-related, I think it will be equally critical to see how you, Mr. Modi, view the social fabric of India and work towards integration of the same in an endeavour to take everyone along with yourself in India s growth model and story. To your credit, since 2002, Gujarat has been a very peaceful state, but I am sure, Mr. Modi, you would recognise the sensitivity of inclusive growth, something you have spoken extensively about and given the numbers you have got in the elections, it is clear, people have bought your dream - now they want to live it - with you! Mr. Modi, you take over at a very sensitive time in India economic activity is at a trough, inflation is high (and there is the threat of a drought in front of you), interest rates are high (and your finance ministry s relationship with the Reserve Bank of India will be closely watched too), jobs are few, if any, and the overall mood in the country is one of gloom. The mandate given to you by the people of India reflects the need for a change, swift and effective governance, hope, nervous excitement, job creation, infrastructure creation, instilling in each Indian the pride of being an Indian and putting India well and truly on the global map in every possible way. You have the mandate for revival of sentiment, betterment of lives, turning wishes into reality to most, Sir, this burden could wear them down, but having followed your election campaign, this country believes you will do it do not let us down. As you conclude your rallies saying, Bharat Mata Ki Jai. Once again, Mr. Modi, congratulations and lead well. Best Regards, Rahul Arora Chief Executive Officer
Annexure 1 Lok Sabha 2014 Party Seats Bharatiya Janata Party 282 Indian National Congress 44 AIADMK 37 All India Trinamool Congress 34 Biju Janata Dal 20 Shiv Sena 18 Telugu Desam 16 Telangana Rashtra Samithi 11 Communist Party of India (M) 9 YSR Congress Party 9 Nationalist Congress Party 6 Lok Jan Shakti Party 6 Samajwadi Party 5 Aam Aadmi Party 4 Rashtriya Janata Dal 4 Shiromani Akali Dal 4 All India United Democratic Front 3 J&K Peoples Democratic Party 3 Rashtriya Lok Samta Party 3 Independent 3 Indian National Lok Dal 2 Indian Union Muslim League 2 Janata Dal (Secular) 2 Janata Dal (United) 2 Jharkhand Mukti Morcha 2 Apna Dal 2 Communist Party of India 1 All India N.R. Congress 1 Kerala Congress (M) 1 Naga Peoples Front 1 National Peoples Party 1 Pattali Makkal Katchi 1 Revolutionary Socialist Party 1 Sikkim Democratic Front 1 All India Majlis-E-Ittehadul Muslimeen 1 Swabhimani Paksha 1 Total 543
Annexure 2 Political Map of Modi-eval India
Disclaimer Stock Ratings Absolute Returns BUY > 15% HOLD 0-15% SELL < 0% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Access our reports on Bloomberg Type NBIE <GO> Team Details: Name Email Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 3926 8230, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 3926 8100/8101, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 3926 8102/8103, +91 22 6636 8830 Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com +91-22-39268226 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel (W), Mumbai-400013. Board No. : 91 22 3926 8000/1 Fax. : 022 3926 8010