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Would COVID-19 be the trigger to thwart the Retail boom?
Household balance sheet may finally be repaired
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19 May 2020
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Consider a company that is adding up to its leverage and witnessing consistent decline in profits to increase its investments,
and thus, support the nation’s GDP growth. How confident would you be to put your money on this company and such a
nation’s future growth? Not quite, I believe. Over the past several years, Indian households have behaved exactly as this
company: household leverage has gone up and savings have fallen rapidly, while personal consumption has supported India’s
GDP growth. While a year’s worth of savings were enough to cover household outstanding debts in FY12, the ratio doubled in
FY19. This
has been
one of our key concerns related to the nation’s ability to sustain high growth. Amid the concerns related
to COVID-19, we believe this event may act as a trigger to change household behaviors. With the economic environment
turning highly uncertain, not only will households be more thoughtful about their savings but also more calculative about
leverage. Furthermore, even lenders are likely to turn more cautious and rethink their strategy to lend freely and
considerably to the Retail sector. Accordingly, while household total savings rate may remain unchanged (or may fall slightly)
in FY21 due to stressed income growth, changed behaviors may lead to the build-up of savings FY22 onward, helping to repair
the balance sheet of Indian households. Moreover, the composition would certainly shift massively toward financial savings
in FY21. And, this trend would continue in the future, depending on the speed of long-due price correction in the Housing
market (affecting physical savings). The consequences of these adjustments would include weak consumption/investments
and muted GDP growth for the next few years.
While household debt rose
consistently to ~44% of PDI
in FY19 from ~30% in FY10,
household savings fell to
~22% in FY19 from over
30% of PDI in FY11.
Deterioration in the household balance sheet in the past decade has been our key
concern:
Over the past several years, private consumption expenditure (PCE) has
been the key driver of GDP growth in India, with the share of PCE rising to ~60% in
FY20 from 56% of GDP in FY12. In the last seven years (between FY13 and FY20),
while real PCE has grown at an average of 7%, real personal disposable income (PDI)
has posted a CAGR of 5.5%. This is the first time since the 1950s that PCE has grown
at a faster pace than PDI for so many years
(Exhibit 1).
Higher-than-income growth
in consumption was supported by two major factors: lower savings and higher
leverage by Indian households. Although there is no official data on household debt
in the country, our estimates suggest while household debt rose consistently to
~44% of PDI in FY19 from ~30% in FY10, household savings fell to ~22% in FY19,
from over 30% of PDI in FY11
(Exhibit 2).
Exhibit 2:
…led by a combination of higher household debt
and lower household savings
60
45
30
15
0
(% of PDI)
HH savings
HH debt
Exhibit 1:
Private consumption has consistently grown faster
than disposable income since FY13…
(% CAGR)
Real PCE
Real PDI
6.0 6.3
4.0 4.0
2.9
3.6 3.4 3.7
4.0
4.8 4.7
7.0
7.5
6.4
1950s
1960s
1970s
1980s
1990s
2000s
2010s
FY99
FY02
FY05
FY08
FY11
FY14
FY17
FY20F
Data since 2012–13 on new current (2011-12) base
Source: Central Statistics Office (CSO), CEIC, MOFSL
Nikhil Gupta
– Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
Yaswi Agrawal
– Research analyst
(Yaswi.Agrawal@motilaloswal.com); +91 22 7193 4196
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
FUEL
While one year of savings
was sufficient to cover the
entire household debt a
decade ago, the ratio has
now doubled to two years
of savings.
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Notably, most of the reduction in household savings has come from physical savings,
which have fallen to ~15% of PDI in recent years from the peak of 19–20% in
FY12/FY13. On the other hand, net financial savings fell marginally to 8.5% in FY19
from ~9% in FY12/FY13
(Exhibit 3).
This implies that consumers chose to replace
physical savings with consumption (partly debt-driven) rather than financial savings.
Consequently, while one year of savings was sufficient to cover the entire household
debt a decade ago, the ratio has now doubled to two years of savings
(Exhibit 4).
Exhibit 4:
…due to which household debt has now doubled
to two years’ worth of savings
2.4
1.8
1.2
0.6
0.0
(Years)
HH debt/HH savings
Exhibit 3:
Households replaced physical savings with
consumption rather than financial savings…
(% of PDI)
Financial savings
Physical savings
FY99
FY02
FY05
FY08
FY11
FY14
FY17
FY20F
FY99
FY02
FY05
FY08
FY11
FY14
FY17
FY20F
Data since 2012-13 on new current (2011-12) base
Source: CSO, RBI, CEIC, MOFSL
This structural deterioration in the household balance sheet has been at the core of
our postulation,
wherein stable consumption growth has meanwhile supported the
nation’s GDP growth.
COVID-19 could lead to change in household behaviors…:
Consequently, we have
always believed that the current model of consumption-driven economic growth is
highly unsustainable. There are only two ways out of this: a) household real
disposable incomes start to increase rapidly (>7%), while consumption continues to
grow at a stable pace (of ~7%), or b) consumption growth slows below income
growth. In either case, household savings would be repaired; however, while real
GDP growth would remain high in the former case, it would decelerate sharply in
the latter.
We believe that COVID-19
may act as a trigger to
change household
behaviors.
Amid concerns related to COVID-19, we believe this event may trigger a change in
household behaviors. With the economic environment turning highly uncertain, not
only would households be more thoughtful about their consumption but also more
conscious of their savings.
A detailed breakup of PCE suggests that household spending on “Discretionary”
items (such as transport, recreation and culture, hotels and restaurants, and
miscellaneous exp.) has grown at a CAGR of 17% in the last five years, while
spending on “Essentials” and “Part-discretionary” increased at an average of just
10% between FY14 and FY19. Consequently, the share of Essentials fell to 58% in
FY19 (for which recent data is available) from 62% of PCE five years ago and Part-
Discretionary spend fell to 13% from 15%; on the other hand, Discretionary spend
surged to 29% of PCE in FY19 from 23% in FY14
(Exhibits 5, 6 on the following page).
19 May 2020
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Exhibit 5:
Discretionary spend has increased much faster in
the past five years…
32
24
16
8
0
Avg: 10%
Avg: 10%
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY12
FY13
FY14
FY15
FY16
FY17
61.4
62.1
62.2
61.8
Essentials
(% YoY)
24.4
Avg: 17%
14.2
23.9
14.0
23.3
14.6
23.5
14.7
26.1
14.5
59.4
26.5
13.9
59.6
Part-discretionary
Discretionary
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Exhibit 6:
…due to which its share has also risen rapidly
since FY14 (% of PCE)
(%)
Essentials
Part-discretionary
Discretionary
27.9
13.2
58.9
29.0
13.4
57.6
FY18
FY19
Source: Central Statistics Office (CSO), CEIC, MOFSL
The classification of PCE into the three baskets – Essentials, Part-discretionary, and
Discretionary – is demonstrated in
Exhibit 7.
Our forecast suggests that while private
spend on Essentials could grow faster at 12% YoY in FY21, spend on Part-
discretionary could decline 10%; discretionary spend could fall as much as 30%.
Consequently, nominal PCE may decline ~3% in FY21; however, it may decline ~6%
in real terms. With the fall in PCE, nominal/real GDP would also decline this year, as
would nominal/real PDI.
Exhibit 7:
Breakup of PCE into Essentials, Discretionary, and Part-discretionary (% of PCE)
PART-DISCRETIONARY - 13% (15%)
Alcoholic beverages - 2% (2%)
Clothing & Footwear - 6% (7%)
HH furniture & fixtures - 3% (3%)
Personal care & effects - 2% (2%)
DISCRETIONARY - 29% (23%)
Transport - 17% (14%)
Recreation etc - 1% (1%)
Hotels & rest - 2% (2%)
Miscellaneous - 10% (6%)
ESSENTIALS - 58% (62%)
Food and non-alcoholic beverages - 28% (32%)
Housing rentals, Electricity and Others - 14% (16%)
Health - 5% (4%)
Communications - 2% (3%)
Education - 4% (4%)
Financial services including insurance - 4% (5%)
Data for FY19 for all components; Break-up of Miscellaneous into ‘Personal care & effects’ and ‘Financial services’ are our estimates
Source: CSO, CEIC, MOFSL
…resulting in higher savings and slower consumption growth:
Not only would
households be more calculative about adding to their leverage, but lenders would
be more cautious and rethink their strategy to lend freely and considerably to the
Retail sector.
Overall, in the past five years, while banks’ lending to the Industrial
sector has grown at a muted ~2%, the Personal Loans category has grown rapidly at
a CAGR of 17%; moreover, credit to the Services sector (excluding Non-Banking
Financial Companies) has increased modestly at 9.5%. Consequently, the share of
personal loans has risen to 28% of bank loans in FY20 from 18% in FY14; on the
other hand, it has fallen to 32%, from 46%, for the Industrial sector and remains
broadly stable at 19% for the Services sector
(Exhibit 8-9 on the following page).
19 May 2020
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Exhibit 8:
Retail lending has been the focus of the Banking
sector over the past several years…
Agri etc
40
28
16
4
(8)
(% YoY)
Industry
Services*
Personal loans
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Exhibit 9:
…due to which its share has also risen rapidly
since FY14 (% of bank loans)
Agri
25.7
2.4
20.3
39.2
12.4
Industry
21.6
3.8
21.0
40.5
13.0
Services*
18.2
5.4
18.4
45.2
12.7
18.3
5.3
18.9
45.5
12.0
NBFCs
22.8
5.5
19.9
37.8
14.0
Personal
27.7
8.8
19.4
31.5
12.6
* Excluding NBFCs
Source: Reserve Bank of India (RBI), CEIC, MOFSL
This sharp growth in retail/personal loans was driven by borrowers as well as
lenders. While lenders found retail borrowers more creditworthy and safer than the
corporate sector, Indian households saw a massive rise in their access to loans. Since
household investments in real assets (physical savings) have weakened in the past
several years, it is clear that higher borrowings have funded consumption spending,
such as credit card purchases, vehicles, education, and foreign travel.
Consumer spending
patterns may take several
years to reflect faster
growth in the
Discretionary/Part-
discretionary categories;
related loan demand
growth would also be
subdued in the future.
We believe that one of the long-run effects of COVID-19 could be to help consumers
stay away from massive discretionary spending, which has been the key driver of
PCE for the past few years. It may be several years before consumer spending
patterns alter enough to result in faster growth in the Discretionary/Part-
discretionary categories, currently 30–40% of the PCE basket. Moreover, related
loan demand growth would also be subdued in the foreseeable future. With
laborers and workers severely affected by the loss of businesses and economic
activity due to COVID-19, it would be equally important for banks to also be more
careful about their Retail loan book, which was considered highly safe until a few
quarters back.
We believe these factors could help repair the household balance sheet in India.
While household total savings ratio may remain unchanged (or fall marginally) in
FY21 due to stressed income growth, changed behaviors may lead to the build-up of
savings FY22 onward as income growth starts to recover.
Composition of household
savings would certainly shift
toward financial savings in
FY21, and would continue,
depending on the speed of
long-due price correction in
the Housing market.
It is also evident that the composition of household savings would shift massively
toward financial savings in FY21. And, this trend would continue in the future,
depending on the speed and extent of long-due price correction in the Housing
market (affecting physical savings).
The consequences of these adjustments would be weak consumption/investments
and muted GDP growth for the next few years. Eventually, we believe investments
would replace consumption as the primary growth driver, leading to sustained
high growth in the future.
19 May 2020
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Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
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*In
case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30
days take appropriate measures to make the recommendation consistent with the investment rating legend.
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INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond,
NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. which is a group company of MOFSL. Private Equity is offered
through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL. Research & Advisory services is backed by proper research. Please read the Risk
Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee of the returns. Investment in securities market is subject to market risk,
read all the related documents carefully before investing. Details of Compliance Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOFSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company
Law Tribunal, Mumbai Bench.
19 May 2020
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