SEPTEMBER 2021

India Strategy
Retail Euphoria at risk

Nandan Chakraborty / Kruti Shah

(Dir) +91-22-42022501 / +91-22-42022629
Email: nandan@damcapital.in / kruti@damcapital.in
 Executive Summary

 Household (HH) savings rate hit a 11-year record in FY21E at 24% of GDP, despite decline in net disposable
income (due to lower employment). Thus, savings came at the cost of lower private consumption

 Opening up of spending avenues (lifting up of services restrictions) and normalizing of spending pattern in
H2FY22 could cause savings to decline by 9.6% yoy, i.e., a fall of Rs 4.6trn compared with FY21

 Household investments were record-high in equity markets at ~Rs 2.5trn in FY21. With household savings
expected to moderate in FY22, retail investment into equities are at vulnerable levels

 Moderating retail flows (only 8.6% of total flows) may not result in an overall market crash, given economic
recovery, low interest rates and continuing FII equity inflows, due to liquidity in the US. However, vulnerable
pockets of the markets may suffer

 We have considered BSE 500 (excluding Nifty) with high retail participation, i.e. individuals holding shares up to
Rs2lakh. Stocks that saw significantly higher retail participation since March 2020, include Vodafone, PNB Bank,
Adani Power, Coforge, Trident, Union Bank of India, Future Retail, etc. (ref slide 14 for the list); these face
higher risk if retail flows moderate
 Rise in urban retail consumption, as money seeps into the real economy, would be a positive for 18-20% of the
consumption basket, which had taken a hit in FY21. These include services (transport, hospitality, tourism,
personal services etc) entertainment and clothing & footwear

2 | September, 2021
 HH savings rate at record high in FY21

 HH savings rate hit a 11-year record in FY21E at 24% (19% yoy Sharp drop in net disposable income
Net national disposable income growth (%)
growth) of GDP, despite decline in net disposable income. We 20
believe the continued increase in savings came at the cost of
15
lower private consumption, which dipped by Rs 7.4trn, which
10
corroborates with similar increase in HH savings.
5
 With the opening up of economy and strong vaccination drive, 0
a large part of incremental income should flow towards
-5
consumption and resumption of the economy.

FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Source: CMIE, DAM Capital

HH savings rate rises to 24.1% of GDP from a 4-year average of HH savings to normalize after an abnormal blip
18.8% Household sector Gross Savings Private Consumption
Rate of HH savings Private Consumption % of GDP
70 HH Disposable Income
180
60 (Rs tn)
50 135
40
90
30
20 45
10
0
0

FY19
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18

FY20
FY21E
FY22E
FY97
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E

Source: RBI, CAG, IRDAI, CMIE, Bloomberg, DAM Capital Source: RBI, CAG, IRDAI, CMIE, Bloomberg, DAM Capital

3 | September, 2021
 Evidence of fall in income levels in FY21
Formalized sector witnessed employee cost growth of 5% in FY21,
Employment levels fell by ~22mn in FY21 but significantly picked up over the last couple of quarters
Change in Employed person (in '000) BSE500 Employee Cost growth (%)

2,787 25
5,000

0 20

-5,000 -1,321
15
-5,292
-10,000
10
-15,000

-20,000 5
-21,679
-25,000 0
FY18 FY19 FY20 FY21 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

Source: CMIE, DAM Capital Source: Cline, DAM Capital

Income tax collections suggest overall shrink in income levels

Income Tax Collections growth • Employee cost in BSE 500 dropped to 5% yoy growth in FY21
40 • Although there has been marginal growth in the formal sector, overall,
30 national income declined – this suggests significantly higher impact on the
informal economy
20
o Net disposable income fell by 2.7%, as also corroborated by the fall in
10 employed people by 21.7mn, and 2% decline in income tax collections
0 • However, BSE 500 employee cost sharply recovered in Q4FY21 and in
-10
Q1FY22 to a growth of 9% (CAGR compared to Q1FY19) – services sector,
excluding BFSI and IT remain a drag
FY06
FY03
FY04
FY05

FY07
FY08
FY09
FY10

FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY11

Source: India Budget, CAG, DAM Capital

4 | September, 2021
 Abnormal blip in HH Savings
Gross savings surged significantly to 24% of GDP, which Boost in incremental deposits – highest since demonetisation,
began tapering off in Q1FY22 which was an abnormal period
Small Savings (excluding PPF) Incremental Bank Deposits (Rs bn)
(Rs bn) Investments 16,000
Currency
10,000 Provident and Pension Funds (including PPF)
12,000
8,000 Life Insurance Funds

6,000 8,000
4,000
2,000 4,000

0
0
Q3FY19

Q1FY22E
Q1FY19

Q2FY19

Q4FY19

Q1FY20

Q2FY20

Q3FY20

Q4FY20

Q1FY21

Q2FY21

Q3FY21

Q4FY21E
-2,000

FY05

Jul-21
FY00
FY01
FY02
FY03
FY04

FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Source: RBI, CAG, IRDAI, CMIE, Bloomberg, DAM Capital Source: CMIE, DAM Capital
Largest increase in currency in circulation, aided by significant
government support in rural areas • Our calculations suggest that gross HH savings would
Incremental Currency in Circulation (Rs bn) CIC % of GDP have surged to record high levels of Rs9.6trn in Q4FY21,
4,800 15 before tapering in Q1FY22
3,600 13 • Incremental increase in deposits have been at record-
high levels, i.e., a growth of ~24% yoy. A large part of the
2,400 11
increase was observed in Q1 and Q2FY21, when high
1,200 9 restrictions on mobility were imposed

0 7
• Currency in circulation is also expected to have surged by
Rs3.9trn in FY21. A large part of government transfers in
FY78

FY00
FY74
FY76

FY80
FY82
FY84
FY86
FY88
FY90
FY92
FY94
FY96
FY98

FY02
FY04
FY06
FY08
FY10
FY12
FY14
FY16
FY19
FY21

FY21 to rural areas could have led to this rise

Source: CMIE, CAG, DAM Capital

5 | September, 2021
 Record-high household savings in equity markets at ~Rs 2.5trn
Incremental household equity investments surges to record highs Outstanding HH savings as % of GDP surged way above 8.5% by
Q1FY22, on high incremental flows and wealth effect…
HH Savings in Shares & Debentures (Rs bn) Outstanding HH Savings in Mutual funds % of GDP
3,000 8.5
8.0
2,000 7.5
7.0
1,000 6.5
6.0
0 5.5
5.0
-1,000

Jun-2018

Jun-2019

Jun-2020
Sep-2018

Dec-2018

Mar-2019

Sep-2019

Dec-2019

Mar-2020

Sep-2020

Dec-2020
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY97
FY98
FY99

Source: RBI, AMFI, Cline, DAM Capital Source: RBI, DAM Capital
Demat accounts - 18.5mn new accounts added in last 15
… reflected in overall increase in HNI and retail AUM months - highest in 6 years
Mutual Fund AUM (Rs bn)
15.0
18,000 HNI Retail 12.3
12.0
13,500
9.0
6.2
9,000
6.0
3.8
4,500 2.6 2.5
3.0 1.5
1.1

0 0.0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Jun-21

Source: CMIE, CAG, DAM Capital Source: NSDL, DAM Capital

6 | September, 2021
 HH savings rate to moderate in FY22
 In FY21, there was an abnormal blip in overall savings pattern. With limited spending avenues (6 months of full lockdown and
services remaining shut till now), there is a pent-up demand for 18-20% of the personal consumption basket (clothing,
entertainment, travel, etc). Opening up of these (lifting up of services restrictions) and normalizing of spending pattern in
H2FY22 will likely lead to lower savings. Moreover, if manufacturing and services operations operate at full capacity, it could
result in idle money flowing into business operations as well. Thus, savings could decline by 9.6% yoy, i.e., a fall of Rs4.6trn
compared with FY21 level (total household savings at Rs48trn)

 For instance, employment levels of retail traders have fallen by over 30mn. They would have saved a large part of their working
capital income last year due to the close down, which they would now require to plough back in business this year

 Rs4.6trn is obtained from normalizing the expenditure to 80.5% of disposable income levels
Personal consumption breakup Our estimates for savings, private consumption and disposable income
Personal Consumption breakup (%) FY22E
FY21E
Food & non-alcoholic beverages Housing, water, etc (Rs tn) vs
vs FY20
Furnishings & household equip Health FY21E
Communication Education
Miscellaneous goods and services Clothing and footwear
FY17 FY18 FY19 FY20 FY21E FY22E Change Rs tn
Transport Recreation and culture
Household sector Gross
Restaurants and hotels 2.08 28 33 36 40 48 43 7.7 (4.6)
Savings
0.79
Private Consumption 91 100 112 123 116 136 (7.4) 20.3
16.88
Affected due to Covid 29.09 HH Disposable Income 114 126 142 153 148 169 (4.6) 20.6

GDP 154 171 189 204 197 226 (6.1) 28.6

5.71
% of Disposable Income

Household sector Gross

15.26 24.4 26.2 25.7 26.1 32.1 25.4
13.31 Savings
4.75 2.37 4.86 2.77 Private Consumption 79.9 79.6 79.1 80.5 78.0 80.5
Source: CMIE, DAM Capital

7 | September, 2021
 Higher direct retail participation in equity markets, both primary & secondary
Primary market activity – Amount of retail IPO subscription
applied in FY21 shot up to Rs772bn, higher than last 6-year avg Sharp rise in non institutional turnover in FY21 (%)

Retail amt of shares applied (Rs bn) Institutional - 90 dma Non-Institutional - 90 dma
772 80
800
600 614
600 60

400 333 40

191
200 120 20
90

0 0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Source: DAM Capital Source: Bloomberg, DAM Capital

BSE 500: Domestic, institutional & retail holdings in equities

 Direct retail participation has increased significantly
DII Hldg (%) Individual Hldg (%) - RHS
16.0 9.0

14.7 14.1  Evidence suggests that participation of retail

8.6 8.6
14.0 13.9 investors have increased from 8.1% in FY20 to 8.6%
13.3
8.5 8.2
12.0 8.0
12.4 8.0 8.1 in FY21
7.9 11.7 7.9
11.1 7.8
10.3
10.0
 SIP investment flows, on the other hand, have
7.5 7.4
slowed in FY21 to Rs961bn from Rs1trn
8.0 7.0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 Jun-21

Source: Cline, DAM Capital

8 | September, 2021
 Wealth creation in last 12 months ~Rs 4.8trn for HH (including flows of Rs2.5trn)

Individual retail holding through direct participation in equity Incremental DII + Individual holdings in equity markets
markets has increased by Rs7trn from FY20 increased by Rs10.1trn since the beginning of COVID
Individual Hldg (Rs tr) DII Hldg (Rs tr) Individual Hldg (Rs tr) DII Hldg (Rs tr)

6.3
28
27

20 4.5
16 17 3.0
2.9
12 2.9 4.8 1.6
9 9 2.2 1.7 2.4
16 18 1.0 0.6 1.4
11 11 -0.3 0.0
8 11
7 6 -0.2

FY15 FY16 FY17 FY18 FY19 FY20 FY21 Jun-21 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Jun-21

Source: Cline, DAM Capital Source: Cline, DAM Capital

Note: MFs form ~60% of DII and HNI+ retail form ~83% of MF Equity
AUM

 Equity allocation for individuals increased significantly in FY21, with incremental inflow of Rs2.5trn.
Individual holding includes retail, HNI and PMS
 According to equity market holding pattern, there has been an increase of Rs4.8trn in individual
wealth. In additional to this, DII holding increased by Rs6.3trn
 MFs form ~60% of DII holding and further, retail form 83% of MF holding - this implies an increase of
Rs3trn in wealth

9 | September, 2021
 Retail interest in midcaps is high

 Retail holdings in non-Nifty stocks have increased by Rs3trn since Mar 2020, of which, a higher proportion is
in small cap stocks- largely on account of wealth effect
 Also, the proportion of retail shareholding in NSE mid caps has risen from 8.8% in FY20 to 9.8% in Q1FY22,
making it more vulnerable, if retail flows moderate

Overall holding in retail is up 6trn from COVID lows, of which, mid Retail holding in Nifty and NSE midcap index: Disproportionate rise in
& small caps have seen 50% increase midcaps
Mar-20 Jun-21 Nifty NSE Midcap Others (ex Nifty & Midcaps)
Up 6trn 10.0
20 9.6 9.8
9.5 9.4
15 17.5 9.0 9.1
Up 3 trn 9.0
8.8 8.8 8.9
8.7
8.5 8.5 8.5
10 Up 2 trn 8.4
Up 1 trn 11.3 8.2
9.8 8.0 8.1
7.9 7.9
7.7 7.7 7.8
5 6.7 7.5 7.5
5.2 7.4 7.4
1.5 2.6 3.1 7.3
0 7.0 7.0
Nifty NSE Midcap BSE500 (ex Nifty & Overall BSE500 6.5
Midcap) FY15 FY16 FY17 FY18 FY19 FY20 FY21 Jun-21

Source: Cline, DAM Capital Source: Cline, DAM Capital

10 | September, 2021
 Midcaps rose post demonetisation, as HH savings increased, and then fell as it normalised

Current Indices Movement

Nifty Nifty Midcap Nifty Smallcap
210

170
Current rally in midcaps and
small caps, with increase in
130 retail participation

90

50
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21

Indices Movement during and post Demonetisation

Nifty Nifty Midcap Nifty Smallcap
170

145
Demonetisation led to a rally in
120
midcaps,
which dissipated once it
95 normalised

70
Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

Source: Bloomberg, DAM Capital

11 | September, 2021
 Market crash not likely if retail inflows moderate

Despite high valuations of the Sensex (FY22 PE of 19.5x versus 17.6% growth in FY23E), we do not expect a market crash, due to
the following:
 Resumption of economic activity after the lockdowns have ended
 US government stimulus moving from consumer savings (compared to pre-COVID levels, bank deposits rose by USD3.9trn vs
USD986bn rise in private consumption) to infra (with a multiplier effect on demand) and US Fed treating inflation as transitory,
keeping rates low. Thus, US equity flows to remain robust, in turn fueling EM flows. With Chinese markets dicey, tech facing
regulatory clampdown and economic growth still weak, India could see more FII inflows
 RBI keeping interest rates low, choosing growth over inflation control. Across the spectrum, interest rates for loans, etc., are
also low
We expect a sideways market overall. Risks to call are monsoon weakness (9% below normal), early normalization of rates by Fed
& RBI, and worsening COVID strains. Most domestic indicators (like GDP, PMI etc) still point towards the economy operating below
pre-COVID levels. Risk here would be if private consumption doesn’t normalize this year, along with pent-up demand in services
Rise in urban retail consumption, as money seeps into real economy could be a positive for consumer discretionary
A large part of the US stimulus has been fed into bank deposits
US incremental increase compared to pre-covid levels (USD bn)
Personal Income Private Consumption Bank Deposits
4000

3000

2000

1000

0
Jun'21 vs pre-covid (Feb'20)

Source: St. Louis Federal Reserve, DAM Capital

12 | September, 2021
 High Frequency Economic indicators – marginal pickup in activity levels post wave 2
E-way bill generation has risen way above pre-COVID levels Power generation has normalized above the pre-COVID level in
(formalization of economy), but remains 10% below recent peak Jul 2021
E-way bill generation (in mn) Power generation (in mn kwh)
80 1,35,000

1,25,000
60
1,15,000
40
1,05,000

20 95,000

85,000

May-…

May-…

May-…

May-…

May-…
0
Feb-…

Feb-…

Feb-…
Jun-…

Dec…

Jun-…

Dec…

Jun-…

Dec…

Apr-…
Jun-…
Apr-…

Apr-…

Apr-…
Aug…

Aug…

Aug…
Oct-…

Oct-…

Oct-…

Feb-17

Feb-18

Feb-19

Feb-20

Feb-21
Aug-16
Nov-16

Aug-17
Nov-17

Aug-18
Nov-18

Aug-19
Nov-19

Aug-20
Nov-20
Source: CMIE, DAM Capital Source: CMIE, DAM Capital

Although petroleum consumption has picked up, it still Economic activity levels in the services sector still remain in
remains below pre-COVID levels declining trajectory
Petroleum Consumption ('000 tonnes)
20,000 Manufacturing PMI Services PMI
60

17,000 45

14,000 30

11,000 15

8,000 0

Aug-20
Nov-16

May-17

Nov-17

May-18

Nov-18

May-19

Nov-19

May-20

Nov-20

May-21
Aug-16

Aug-17

Aug-18

Aug-19

Aug-21
Feb-17

Feb-18

Feb-19

Feb-20

Feb-21
May-18
Nov-16

May-17

Nov-17

Nov-18

May-19

Nov-19

May-20

Nov-20

May-21
Aug-16

Feb-17

Aug-17

Feb-18

Aug-18

Feb-19

Aug-19

Feb-20

Aug-20

Feb-21

Source: CMIE, DAM Capital Source: CMIE, DAM Capital

13 | September, 2021
 What is vulnerable if individual retail inflow slows?
 Any negative trigger due to retail pullout (only 8.6% of total flows) may not affect overall markets, if FII inflows remain strong.
However, vulnerable pockets of the markets may suffer
 We have considered BSE 500 (excluding Nifty) with high retail participation, i.e., individuals holding shares up to Rs2lakhs.
Stocks which have seen significantly higher retail participation since March 2020 are tabulated below. Of these, we have
Outperformer rating on BHEL and Tata Power

Vulnerable stocks of BSE500

Individual holding (%), where market capital up to Rs. 2
Individuals holding market capital up to Rs. 2 lakh ('000)
lakh
Company Mar-20 Jun-21 Chg (bps) Mar-20 Jun-21 Chg (%) Abs Chg
Tata Power Company Ltd 12.2 17.7 548 344 1,367 297 1,023
Vodafone Idea Ltd 3.7 6.6 298 729 1,686 131 956
Punjab National Bank 5.5 10.0 451 758 1,582 109 824
Adani Power Ltd 2.8 6.2 338 299 974 225 675
Coforge Ltd 4.7 5.8 106 36 650 1,709 614
Bharat Heavy Electricals Ltd 7.7 15.1 745 572 1,118 95 545
Trident Ltd 9.8 13.7 382 145 632 335 487
Union Bank of India 4.7 5.2 48 296 674 128 378
Future Retail Ltd 2.2 37.1 3,496 57 406 618 349
Tata Chemicals Ltd 16.3 23.5 720 178 494 177 316
Steel Authority of India Ltd 3.9 5.7 185 388 702 81 313
Bank of Baroda 7.4 9.0 155 863 1,166 35 303
Motherson Sumi Systems Ltd 5.3 5.4 9 317 576 82 259
Ircon International Ltd 5.1 14.0 898 67 237 255 170
Bandhan Bank Ltd 3.2 4.8 152 293 462 58 169
Power Finance Corporation Ltd 3.1 4.3 116 224 337 51 114
Berger Paints India Ltd 7.2 6.9 -30 114 180 58 66
Greaves Cotton Ltd 12.4 19.1 670 75 136 81 61
Mishra Dhatu Nigam Ltd 4.5 8.9 438 41 86 113 46

14 | September, 2021
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Contd…

15 | September, 2021
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The analyst certifies that all of the views expressed in this research report accurately reflect his/her personal views about any and all of the subject issuer(s) or securities. The analyst certifies that no part of his / her compensation was, is, or will
be directly or indirectly related to the specific recommendation(s) and/or views expressed in this report.

Research Disclaimer - Notice to US Investors

This report was prepared, approved, published and distributed by DAM Capital Advisors Limited (Formerly IDFC Securities Limited), a company located outside of the United States (a “non-US Company”).This report is distributed in the US by DAM
Capital (Parent of DAM Capital (USA) Inc.) [Formerly IDFC Capital (USA) Inc.] only to major U.S institutional investors (as defined in Rule 15a-6 under the U.S Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption 15a-(2)
of the Rule and any transaction effected by a U.S customer in the securities described in this report must be effected through DAM Capital USA as defined in the Rule.
Neither the report nor any analyst who prepared or approved the report is subject to U.S legal requirements or Financial Industry Regulatory Authority, Inc. (“FINRA”) or other regulatory requirements pertaining to research reports or research
analysts. The non-US Company is neither registered as a broker-dealer under the Exchange Act, nor is a member of FINRA, Inc. or any other U.S. self-regulatory organization. The non-US Company is the employer of the research analyst(s)
responsible for this research report. The research analysts preparing this report are residents outside the United States and are not associated persons of any US regulated broker-dealer and therefore the analyst(s) is/are not subject to
supervision by a US broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with US rules or regulations regarding, among other things, communications with a subject
company, public appearances and trading securities held by a research analyst account.
It is distributed in the United States of America by DAM Capital under 15a-6(a)(2) and elsewhere in the world by DAM Capital or any authorised associate of DAM Capital.

ANALYST DISCLOSURES
1. The analyst(s) declares that neither he/she or his/her relatives have a Beneficial or Actual ownership of > 1% of equity of Subject Company/ companies;
2. The analyst(s) declares that he/she has no material conflict of interest with the Subject Company/ companies of this report;
3. The research analyst (or analysts) certifies that the views expressed in the research report accurately reflect such research analyst's personal views about the subject securities and issuers; and
4. The research analyst (or analysts) certifies that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.

Explanation of Ratings:
1. Outperformer : More than 5% to Index
2. Neutral : Within 0-5% (upside or downside) to Index
3. Underperformer : Less than 5% to Index

Copyright in this document vests exclusively with DAM Capital Advisors Limited (Formerly IDFC Securities Limited).

SEBI Registration Nos. of DAM Capital Advisors Limited (Formerly IDFC Securities Limited)
Research Analyst INH 000000 131
Stock Broker
NSE Capital Markets INZ000207137
NSE Futures & Options
BSE Capital Markets
BSE Futures & Options
Merchant Banker INM000011336

16 | September, 2021
 DAM Capital Advisors Limited DAM Capital (USA) Inc.
(Formerly IDFC Securities Limited) [Formerly IDFC Capital (USA) Inc.]
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17 | September, 2021