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The current correction in oil prices is hugely positive for India as highlighted below:
Every USD 10/bb. fall in crude oil price improves Indias current Account Deficit by
around USD 9 billion or 0.5% of GDP.
Every USD 10/bb. fall in oil price can boost GDP growth by around 10 bps and reduce
fiscal deficit by 0.10%.
Every USD 10/bbl. Fall in crude oil prices lowers CPI inflation by 20 bps and WPI
inflation by 50 bps.
(source: Asian Economic Outlook, Nomura, 24th November, 2014)
With a population of more than a billion, a mere 1% of the population participates in capital
markets, and of that only a fraction in active. Indian households have traditionally preferred
safety of bank deposits and government saving schemes and much less than 10% of their
investments in financial assets is in shares, debentures and mutual funds.
Over the years, private equity investors have primarily remained minority, less than 25%
stakeholders in investee companies. In addition to it being part of the Indian promoters cultural
mindset towards external investors, PE investors also understand that promoters know the
business and industry best and the business control is of keen interest to Indian promoters.
Investors have started accommodating their investment outlook from merely backing the
business to backing the entrepreneur or promoter. So in instances where the promoter has strong
industry credentials or a successful track record of growing a business, PE investors are open to
backing such ventures.
Raw Materials: Key raw materials for the paint industry include pigments (TiO2), solvents,
resins, chemicals and various crude derivatives. TiO2 typically accounts for 25-30% of total
COGS. Nearly 75-80% of raw materials are sourced locally and the remaining 20-25% are
imported. Much of the raw material prices (whether domestically sourced or imported) (~6065%) are influenced by crude oil and TiO2 movements, which are susceptible to global demand
supply dynamics and thus make the linkage to exchange rate fluctuations meaningful. While
TiO2 prices have been benign in the past few quarters (aided by increased global supply and
weak demand), it is the starting of an uptick there and recent sharp rupee depreciation further
limits gross margin expansion potential for the paint manufacturers.