Fundamental Analysis of Economies around the world and Sectors in India

By

Gaurav Bhargava

K J Somaiya Institute of Management Studies & Research

July, 2010

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Fundamental Analysis of Economies around the world and Sectors in India

By

Gaurav Bhargava

Under the guidance of Mr Nitin Bhatia Designation Organisation Dr. XXXXXXXXXXXXXX Designation IMT, Ghaziabad

K J Somaiya Institute of Management Studies & Research

July, 2010

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Certificate of Approval
We approve this Summer Project Report titled "Fundamental Analysis of Economies around the world and Sectors in India" as a certified study in management carried out and presented in a manner satisfactory to warrant its acceptance as a prerequisite for the award of Post-Graduate Diploma in Business Administration/ Post Graduate Program in International Business for which it has been submitted. It is understood that by this approval we do not necessarily endorse or approve any statement made, opinion expressed or conclusion drawn therein but approve the Summer Project Report only for the purpose it is submitted. Summer Project Report Examination Committee for evaluation of Summer Project Report Name 1. Faculty Examiner 2. PG Summer Project Co-coordinator Signature

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Certificate from Summer Project Guides

This is to certify that Mr. /Ms. XYZ, a student of the Post-Graduate Diploma in Business Administration/ Post Graduate Program in International Business, has worked under our guidance and supervision. This Summer Project Report has the requisite standard and to the best of our knowledge no part of it has been reproduced from any other summer project, monograph, report or book.

Faculty Guide Organization

Organizational GuideDesignation DesignationSIMSR AddressDate Date

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INTRODUCTION

Purpose
This report was prepared with the purpose to forecast the future outlook of some equities while considering outlook of major economies and sectors. This has been done on the basis of analysis of major economies of the world and the sector in which these equities operates. Financial Analysis of those Companies was also done to arrive at a conclusion. Apart from this, report serves many purposes: To trace the trends in major economies of the world and analyze their future outlook. To develop a view point on the recovery of major economies. To determine the performance of 2 sectors on the basis of study conducted. To perform the fundamental analysis on stocks. To provide the valuable result to the organization.

Scope
This project report constitutes of three phases. It covers the economic analysis of major economies of the world which includes The United States of America, European Union, China and India. It also covers fundamental analysis of Automobile and Pharmaceutical Sector in India. Further, it envelops financial analysis of companies like Tata Motors, GlaxoSmithKline, Biocon and Maruti Suzuki. This project consists of three stages. All three are related to each other and influenced by each other in various ways. Major micro and macro level indicators were taken into consideration while working on these phases. PHASE I: Analysis of major economies of the World PHASE II: Sector Analysis/Industries Analysis PHASE III: Company Analysis In first phase, major indicator such as GDP, inflation, unemployment, interest rates, foreign trade, deficit, investments, debt, stock market, etc. were analysed to understand the current scenario and to
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forecast the future outlook on the basis of analysis. In second phase, structure of the sector, current affairs, government policies, investment in that sector were assessed and later on analysed with S.W.O.T Analysis, P.E.S.T Analysis to understand the potential of the sector and predict its performance in nearby future. In third phase, two companies from each sector were picked for study. All the companies were scrutinized with investment rationale and concerns. Later, financial analysis was done to get the internal picture of the company. On the basis of study prediction has been made about their performance.

Limitation
Data for the project is collected through secondary sources which are not purely reliable, though care has been taken by collecting data only from recognized sources. Scope for the project is limited as not covering all the economies and sectors which do influence the value of these stocks. As the project is based on forecasting the behavior of the stock in future, this cant be predicted with cent per cent accuracy. Result of the project is based on the view point; it may vary from person to person. Have to stick to some of the economic indicators only and cannot work on all as there are many available which would be requiring more time to study and analyze them. Time constraint is always there.

Sources and methods

Secondary data from various recognized publications was collected and analyzed to interpret the trend. Data was also collected from websites and researched to forecast the behavior of major sectors and companies. A detailed list has been attached in references. Analysis tools such as SWOT Analysis, PEST Analysis, etc are being used to have a better understanding of the subject in hand. Other than this software will be provided by Research Department for analysis like CMIE (PROWESS), etc. Aid from Company Guide, Miss Astha Jain, Mr Manoj Sachdeva and

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other members of Research Team at Hem Securities Ltd. has been taken before arriving at any conclusion.

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PHASE I

ECONOMIC ANALYSIS

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UNITED STATE OF AMERICA

When the United States sneezes, an economists proverb says, catches a cold.

the rest of the world

The US has an annual domestic gross product of over $14.26 trillion which is over a quarter of the worlds GDP. US is the worlds largest importer and third largest exporter of goods, as well as owner of the worlds largest debt. The American economy is a free-market, private enterprise system that has only limited government intervention in areas such as health care, transportation, and retirement. The role of federal government is decision-making regarding monetary and fiscal policies. After the great depression of 1930's, US first time faced problem of stagflation in 1970's.The

problems faced were the energy shortage, high inflation, and high unemployment. The energy shortage occurred because of a worldwide oil shortage. This oil shortage and increase in demand lead to high inflation problem. The high unemployment was a result of the women work force and a combination of returning soldiers from Vietnam. Unemployment rate went from 3.3 percent to around 8 percent. The economy of the US during the seventies was a hard time for everybody in America. It wasn't good and it just got worse and worse until the 80s. In the 1990s, the American economy experienced the second-longest period of growth in the nation's history. The economy grew at an average rate of 3-4 percent per year and unemployment fell below 5 percent. This long period of growth ended in 2001, when the economy slowed dramatically following a crash in the high-technology sector. But major roadblock that US economy and world economy faced was at the end of 2007 in form of recession. The global economic downturn, the sub-prime mortgage crisis, investment bank failures, falling home prices, and tight credit pushed the United States into a recession by mid2008. GDP contracted till the third quarter of 2009, making this the deepest and longest downturn since the Great Depression. To overcome this recession US Congress established a
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$700 billion Troubled Asset Relief Program (TARP) in October 2008. Also in January 2009 the US Congress passed and President Barack OBAMA signed a bill providing an additional $787 billion fiscal stimulus to be used over 10 years.

GROSS DOMESTIC PRODUCT

Presently US GDP stand at $14.26 trillion.The country ranks 17th in the world in nominal GDP per capita and 6th in GDP per capita at PPP.Real GDP decreased 2.4 percent in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an increase of 0.4 percent in 2008.

Trend in GDP
The 2000 recession was over by 2003, after that US economy grow by 2.5% in 2004. In 2005, Hurricane Katrina slowed growth to 2.9% in 2005. By March 2006, the economy recovered to 4.8% with the housing bubble peak. But high oil prices dragged on growth the rest of 2006, which only grew 2.7%. The economy only grew 1.2% in the first quarter of 2007 as the housing bubble popped. A falling dollar boosted exports, spurring growth to 3.2% in the second and 3.6% in the third quarters. When the Subprime Mortgage Crisis hit in October, growth slowed to 2.1%. Overall, the economy expanded 2.1% in 2007.

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In 2008 and 2009, the economy contracted for four consecutive quarters. The last time this happened was during The Great Depression. The economy fell .7% in Q1 with the Bear Stearns bailout, but resumed 1.5% growth by Q2. When the banking system imploded in the third quarter, the economy shrank 2.7%. It finally grew again by 2.2% in Q3.In Q4 US economy further show sign of recovery and grow by 5.9%.This growth was mainly due to inventory rebuilding and stimulus package given by government.

UNEMPLOYMENT
US unemployment rate stand at 9.4% for 2009 which increases sharply from level of 5.808% in 2008.It is placed poorly at 108 in term of unemployment rate across globe. Reason behind such sharp change in unemployment rate can be attributed to Recession during this period. From start of recession in December 2007 over 8.4 million jobs were lost. The unemployment rate fell from 10.0 to 9.7 percent in January. Employment fell in construction and in transportation and warehousing; while temporary help services and retail trade added jobs. According to the Labor Department, the economy shed 150,000 jobs in December, compared to 85,000 previously reported, but November was revised to a gain of 64,000, up from 4,000. While job losses in prior months were steeper than previously thought, details of the January report supported views the blood bath has stopped. President Barack Obama has declared that job creation will be his top priority in 2010.

EXCHAGE RATE

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The United States dollar has appreciated significantly against the Euro during later months of 2009. Rising from 0.66 euros at the beginning of December to 0.73 euros in the third week of February.The U.S. dollar is an important international reserve currency along with the euro. Despite the dollar's recent losses to the euro, it is still by far the major international reserve currency; with an
JPY CAD EUR GBP

2010 Feb

2010 Jan

2009 Dec

2009 Nov

1.5618

1.6158

1.6226

1.4422

1.0572 1.3680

1.0438 1.4266

1.0537 1.4579

1.2452 1.2797

accumulation more than double that of the euro. Weak dollar is a major cause of concern for U.S

90.1395

91.1011 89.9509 92.9158

INR

46.2752 45.8944 46.5273 46.893

Economy as it increases the price of imports. Moreover, the increased cost of imported raw material and components and the increased price of foreign products will provide coverage for local producers to increase their prices, in order to make more profit.

DEBT
The U.S. Federal Debt is over $12 trillion. This is double the debt in 2000, which was $6 trillion .By end of this year it is expected to go up to $14 trillion. Since 1973, the U.S.A. switched from being a creditor nation and instead has become the greatest debtor nation in the history of humankind. The fiscal policy of the US government has contributed a lot towards increasing the deficit. In order to fund the national debt, the United States relies on selling U.S. treasury bonds to people both inside and outside the country, and in recent times the latter have become increasingly important. Much of the money generated for the treasury bonds came from U.S. dollars which were used to purchase imports in the United States.
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INFLATION
Inflation rate for US stand at -0.7% for 2009 and it is ranked 11th in world in term of low inflation. The cost of living in the U.S. rose in January less than anticipated and a measure of prices excluding food and fuel fell for the first time since 1982, indicating the recovery is showing few signs of inflation. For January 2010 inflation rate in US is 2.6257%.Inflation rate was largely in check despite a period of extraordinarily low interest rates.

The cost of living in the United States remained steady in January, with the price of a variety of goods including medical expenses and cigarettes increasing 0.2 percent. A closely watched measure that excludes volatile food and fuel prices, the cost of living underscored the downward trend: it fell 0.1 percent in January, the first decrease since the recession in 1982.
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EXPORT
United States exports were worth 98058.0 Millions USD in December of 2009. United States is the most significant nation in the world when it comes to international trade. For decades, it has led the world in imports while simultaneously remaining as one of the top three exporters of the world. Main exports are: machinery and equipment, industrial supplies, non-auto consumer goods, motor vehicles and parts, aircraft and parts, food, feed and beverages.

IMPORT
United States imports were worth 145994.0 mn USD in December of 2009. For decades United States has led the world in imports while simultaneously remaining as one of the top three exporters of the world. Its main imports are: non-auto consumer goods, fuels, production machinery and equipment, non-fuel industrial supplies, motor vehicles and parts, food, feed and beverages.

STOCK MARKET

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US have 3 major stock exchanges NASDAQ, DOW JONES and NYSE. NYSE is the world's largest stock exchange by market capitalization of its listed companies at US$28.5 trillion as of May 2008. In the United States, the main stock market index, the Dow Jones Industrial Average, rallied 89 points or 0.87 percent during January year, Industrial 2010. Dow Last Jones Average

stocks were trading at 7182 and the Dow Jones Industrial Average rallied 3143 points or 43.76 percent during the last 12 months. As can be seen from graph US stock market index resurge from its low in March 09 largely due to support from government in term of fiscal stimulus and positive expectation from investor that economy will recover from recession in coming quarters.

OUTLOOK
Economic growth in the U.S. turned positive during the second half of 2009 and with other positive figures coming at start of 2010, US can be said to be on path of recovery .This incipient recovery is being driven by a combination of fiscal and monetary stimulus, assisted by the beginning of a turnaround in the inventory cycle. The key now is how soon and how strongly employment will turn up. There are 5 challenges lying ahead of US economy which need to be tackled:

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 Secure the recovery, by ensuring that policies remain appropriately supportive of the expansion. Protect the poorest and most vulnerable from the impact of the downturn. Reform of the financial sector, with the triple goals of making the sector more effective, of reducing the risks of future instability, and to rethink how the potential costs of financial crises might be borne. Tackle increasing unemployment rate.

EUROPEAN UNION

The Economy of the European Union combines the economies of 27 states established on 1 unified entity in the WTO. The European Union is the largest economy in the world with a GDP of US $14.96 trillion. Internally, the EU is attempting to lower trade barriers and raising the living standards of the member states. Internationally, the EU aims to strengthen Europe's trade position and its political and economic power. November 1993. The EU economy consists of a single market and is represented as a

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The EU faces difficulties in developing and enforcing common policies because of the great differences in per capita income among member states.

GROSS DOMESTIC PRODUCT

Presently EU GDP stand at $14.51 trillion.The country ranks 1st in the world in nominal GDP per capita and 40th in GDP per capita at PPP.Real GDP decreased 4.1 percent in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an increase of 0.5 percent in 2008.
GDP (PPP): $14.51 trillion (2009 est.) GDP-Real Growth Rate : -4.1%

YEAR

EU (27 countries)

Euro area

2001 2002 2003 2004 2005 2006 2007 2008

2% 1.20% 1.30% 2.50% 2% 3.20% 2.90% 0.80%

GDP per capita :$32,700 (2009 est.) GDP - composition by sector : Agriculture: 2.1% (2009 est.) Industry: 25.9%

1.90 % 0.90% 0.80% 2.10% 1.70% 3% 2.70% 0.60%

Services: 71.9%

The EUs share of Gross world product (GWP) is stable at around one fifth. GDP growth, though strong in the new member states, is being affected by sluggish growth in Greece, Italy and Portugal. In 2008 the twelve new member states of Central and Eastern Europe have enjoyed a higher average percentage growth rate than their Western European counterparts. The Baltic States have achieved massive
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GDP growth, with Latvia topping 11%, close to China, the world leader at 9% on average for the past 25 years. Reasons for this massive growth include government commitments to stable monetary policy, export-oriented trade policies, low flat-tax rates and the utilization of relatively cheap labor. But due to recession in 2009 these economies crumbled and not able to maintain such high growth rate. Poland was the leader in term of GDP growth at sluggish rate of 1.7%. The euro-area economy is expected to expand 0.7 percent this year. The economy of the 16 countries sharing the euro will resume growth in 2010 and will expand 1.5 percent in 2011.

CURRENCY
The euro is the single currency shared by (currently) 16 out of 27 of the European Union's Member States, which together make up the euro area. The introduction of the euro in 1999 was a major step in European integration. It has also been one of its major successes: around 329 million EU citizens now use it as their currency. It is managed by European Central Bank (ECB). The euro is the second largest reserve currency and the second most traded currency in the world after the U.S. dollar. During 2009 in real effective terms the dollar's exchange value has fallen by 8% between March and September 2009, thereby reversing the appreciation over the preceding six month period

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During past few months Euro has depreciated significantly against dollar because of c
o n c e r n s

about the public finances of euro zone countries Portugal, Ireland, Greece, and Spain, the so-called "PIGS". Greece is facing the severest crisis and there is fear of bankruptcy of

Greece. Market remains skeptical of Greece paying off its debts and concerns of failure to take appropriate measures to help tackle its fiscal deficit. But as in March 2010 sign of recovery of Greece appreciate Euro again. RATE EURO v/s U.S. DOLLAR ($) . As on 15 March 2010 1 EURO = $ 1.3782. EXCHAGE

INFLATION
Euro area annual

inflation was 1.0% in January 2010, up from 0.9% in December 2009. A year earlier the rate was 1.1%. Monthly inflation was -0.8% in January 2010.
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EU annual inflation was 1.7% in January 2010, up from 1.5% in December 2009. A year earlier the rate was 1.8%. Monthly inflation was -0.5% in January 2010. The main components with the highest annual rates in January 2010 were transport (4.9%), alcohol & tobacco (4.6%) and miscellaneous goods & services (1.9%), while the lowest annual rates were observed for food (-1.2%), communications (-0.9%), clothing, housing and recreation & culture (all -0.3%).Inflation will probably average 0.8 percent in the current quarter before accelerating to 1.3 percent in the three months through June.

UNEMPLOYMENT
For January 2010 Euro area unemployment rate stand at 9.9%while for EU27 it stand at 9.5% The euro area (EA16) seasonally-adjusted unemployment rate was 9.9% in January 2010, the same as in December 2009. It was 8.5% in January 2009. The EU27 unemployment rate was 9.5% in January 2010, unchanged compared with December 20094. It was 8.0% in January 2009. It is estimated that 22.979 million men and women in the EU27, of whom 15.683 million were in the euro area, were unemployed in January 2010. Compared with December 2009, the number of persons unemployed increased by 136 000 in the EU27 and by 38 000 in the euro area. Compared with January 2009, unemployment went up by 3.802 million in the EU27 and by 2.204 million in the euro area.

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STOCK MARKET
In Euro Area, the main stock market or index, the Euro during were 1081 STOXX 50, rallied 267 points 10.14 percent 50 50 stocks rallied February. Last year, Euro STOXX STOXX trading at 1817 and the Euro points or 59.49 percent during the last 12 months. Stock Market in Europe fell drastically after United States declared the financial crisis. There was a global threat as Europe depends a lot on American for their export as well as imports. Moreover, they share a strong corporate relationship because of companies working across the border. There was a possibility that the impact of that crisis will be huge on Europe. That fear resulted into stock crash in European Market in beginning of Jan 08 and market crashed to low of 1817 in March 2009.But due to positive sign across economies and global cues Stock markets across Europe start gaining momentum after that and reach to current level of 2888.

TRADE
The European Union is the largest exporter in the world and the second between the largest member

importer. Internal trade states is aided by the

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removal of barriers to trade such as tariffs and border controls. In the Euro zone, trade is helped by not having any currency differences to deal among most members. The European Union Association Agreement does something similar for a much larger range of countries.

EXPORTS
Euro Area exports were worth 111806.0 Million USD in December of 2009. European exports increased in December as a strengthening global economy and a weaker euro boosted demand for goods from the region. Exports from the euro area rose a seasonally adjusted 3.1 percent from November, when they remained unchanged. Main export partners United States, Russia, Switzerland, China, Turkey.

Germany is the largest exporter in Europe and is known for its excellent standards in engineering and precision manufacturing. This applies well to the automotive and aviation industries it is so active in. Italy is known for its foods, fashion, and cars, all three being major sectors of export. France produces a large amount of agricultural products, such as wines and cheeses, and also has a healthy automotive industry. Fashion is another important export sector for France.

IMPORT
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Euro Area imports were worth 107434.0 Million USD in December of 2009 Euro Area main import partners are: China, United States, Russia, Switzerland and Japan.

The EU is an important trading partner for most countries around the world. Europe consumes a wide range of products, both commercially and privately. Automobiles, energy (oil and gas), heavy industrial machinery, commodities, and foods are some of the largest sectors Europe imports. Electronics, software, and precious metals remain strong on its import list as well.

OUTLOOK
The EU economy is gradually recovering, whilst still facing headwinds. Real GDP started to grow again in the third quarter of
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2009, ending the longest and deepest recession in growth has been driven by the resurgence of global policies undertaken by central banks and governments. losses.

the EU's history. A return to trade and stabilization European companies, helped by

governments and a constructive attitude of workers, have also made great efforts to limit job

CHINA
A Perfect Storm is rising in the East: a society with unmatched resources, remarkable business savvy, an increasingly formidable bargaining positionand aspirations to match.

The economy of the People's Republic of China is the third largest in the world, after the United States and Japan. China is the fastest-growing major economy in the world, and has had the fastest growing major economy for the past 30 years with an average annual GDP growth rate over 10%.
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China is the largest trading nation in the world and the largest exporter and second largest importer of goods. Public sector, dominated by 159 large SOEs is major driver of Chinas Economy. It is expected to become larger than the U.S. economy in the next two decades.

China's economy during the past 30 years has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. In 1979, China began the long process of transformation from a Soviet-style planned

economy, where production decisions were made by the state, to one where market mechanisms would be the main driving force behind economic decisions. Annual inflows of foreign direct investment rose to nearly $108 billion in 2008. China in 2009 stood as the second-largest economy in the world after the US on purchasing power basis, although in per capita terms the country is still lower middle-income. China launched its Economic Stimulus Plan of a RMB 4 trillion (US$ 586 billion) stimulus package on 9 November 2008 to stop the global financial crisis. It has primarily focused on increasing affordable housing, easing credit restrictions for mortgage and SMEs, lower taxes

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such as those on real estate sales and commodities, pumping more public investment into infrastructure development, such as the rail network, roads and ports.

GROSS DOMESTIC PRODUCT

Presently China nominal GDP stands at $4.91 trillion and it is ranked 3 r d across globe. It is the second largest in the world after that of the U.S. with a GDP of $8.8 trillion (2009) when measured on purchasing power parity (PPP) basis. China's economic growth accelerated to 8.7 percent yearon-year in 2009.
GDP (purchasing power parity): $8.791 trillion (2009 est.) GDP-Real Growth Rate : 8.7%

GDP per capita :$6,500 (2009 est.)

RECENT TRENDS China's economic growth

accelerated to 8.7 percent year-on-year in 2009. Since November 2008, the Chinese government has adopted a series of stimulus measures including a 4-trillion yuan investment package, tax cuts, and consumer subsidies to shore up growth and employment. China's economy grew at an average rate of 10% per year during the period 19902004, the highest growth rate in the world. In terms of per capita GDP, from 1978 to 2000.But the growth
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rate has picked up and in 2003, China's GDP per capita surpassed 1,000 U.S. dollars. In 2008, it reached 3,000 U.S. dollars.It is expected to reach 4,000 U.S. dollar by 2010.

UNMEPLOYMENT
Unemployment rate in china stand at 4.3% in December 2009.This is only Chinas Urban Unemployment rate as China didnt publish its Rural Unemployment rate. The real figure is much higher because many of the country's more than 200 million rural migrant workers, who have flocked to the cities in recent years, are not registered. Also the rate above is based on the
number of job seekers registering as unemployed with the government.

Year Unemployment rate Rank 10.10 % 9.80 % 9.00 % 4.20 % 4.30 % 4.30 % 93 88 92 50 49 45

A first order effect of the 2004 recession is that demand for 2005 China's products is falling. Due 2006 less 2007 production is taking place which 2008 in turn making more people 2009 to reduced demand, unemployed.

Percent Change -2.97 % -8.16 % -53.33 % 4.76 % 0.00 %

There are certain issues which the Chinese government should take note of: - There are an increasing number of college graduates which could cause future employment concerns for the government - Another major reason to worry is the large number of people who are migrating from the rural to the urban areas. This could thus create a massive strain on the economic conditions. The gain from capital intensive productions could to an extent be neutralized by this pressure.

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IMPORT
Chinese grew expected February, imports surged 44.7 percent after record growth of 85.5 percent in January. China imports were worth 95.3 Billion USD in January of 2010. China imports mainly commodities: iron and steel, oil and mineral fuels as well as machinery and equipment, plastics, optical and medical equipment and organic chemicals. Chinas main imports partners are: Japan, European Union, South Korea, Taiwan and ASEAN countries. In 2009 Chinas imports were down 11% because of recession across the globe which can be easily visible from graph. . imports than in

faster

EXPORT
China overtook Germany as world top exporter in 2009. Total 2009 exports were more than $1.2 trillion for China, well ahead of the 803.2 billion euro ($1.1 trillion) of Germany. China's newfound status is mostly symbolic but highlights its growing presence as an industrial power and, increasingly, as an investor and key voice in managing the global economy. Exports jumped 45.7 percent in February from a year earlier, following a 21.0 percent rise in January. China exports were worth 109.5 Billion USD in January of 2010. Export growth has continued to be a major component supporting China's rapid economic
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growth. Exports of goods and services constitute 39.7% of its GDP. China major exports are: office machines & data processing equipment, telecommunications equipment, electrical machinery and apparel & clothing. Chinas largest exports markets are European Union, United States, Hong Kong, Japan and South Korea.

CHINA MAJOR IMPORTER AND EXPORTER FOR 2009

STOCK MARKET
The Stock Market of China is emerging quickly in the past decades to become one of the largest capital markets in the world, with significant influence on the world capital markets and the overall economy. China has two major stock markets: one in Shanghai and another on Shenzhen. They
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opened in 1990. Their performance is measured by the Shanghai and Shenzhen Composite indexes and the benchmark Shanghai and Shenzhen 300 index. Market value of the Shanghai and Shenzhen stock exchanges came to $2.70 trillion and $870 billion respectively, ranking the 6th and 16th among world's bourses.

FOREIGN DIRECT INVESTMENT

China attracted a total amount of $852.6 billion of foreign direct investment (FDI) from 1979 to 2008, making it the number one target for FDI among developing countries. Foreign investment remains a strong element in China's rapid expansion in world trade and has been an important factor in the growth of urban jobs. Foreign direct investment (FDI) into China rose for the sixth consecutive month in January, up 7.79 percent year on year to 8.13 billion U.S. dollars. The government approved the establishment of 1,866 overseas-funded ventures in January, a year-on-year increase of 24.73 percent.FDI in January mainly flowed into the manufacturing sector, despite an overall decrease in the sector of 11.57 percent year on year. The sector attracted 48.65 percent of total FDI. This investment came primarily (45%) from Hong Kong and Macau. The United States and Japan both contributed about 9% of the FDI in China. Seven percent of foreign investments in China came directly from Taiwan. Singapore, South Korea and the Virgin Islands contributed between 5 and 6 percent.

INFLATION

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China inflation stands at 2.7% in February 2010 which is 16- month high. It eases little bit in January 2010 from December 2009 level of 1.9% to 1.5%. This increase in inflation may raise expectations that interest rates will be hiked in the short term. Rising international commodity prices are fueling prices as a domestic oversupply of goods eases. This inflation is primarily being driven by increases in the price of food and, in second place, by housing costs. Looking at the detail of China's February CPI data the price of foodstuffs rose by 6.2% undoubtedly a severe effect in a country where a far higher proportion of household expenditure goes on food than in a developed economy. Real estate prices rose at a record 10.7% in February. However China's non-food prices rose by only 1.0% in February - clothing prices actually fell by -1.3% and transport and communication costs rose by only 0.1%.

EXCHANGE RATE
Chinas monetary policy has been the target of persistent criticism for fixing the value of RMB. The RMB was fixed to the US dollar in 1997, and then later unleashed in 2005. Until 2005 for China fixing was the criticized

value of the RMB to the US dollar. After that it was criticized for not allowing the RMB to appreciate
Exchange rate between 30/4/2009 and 12/3/2010

enough.

Since 2008 the RMB exchange rate has remained at around 6.83 yuan per dollar. Its current account surplus in 2008 was $426 billion compared with $68.7 billion in 2004. China's foreign exchange reserves have also skyrocketed, reaching $2.1 trillion at the end of June 2009. The Chinese Yuan exchange rate for February, 2010 averaged 6.829 CNY to
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USD. That's 0.2 basis points higher than the January, 2010 rate of 6.827, and 0.8 basis points lower than the February, 2009 rate of 6.836. The average Chinese Yuan conversion rate over the last 12 months was 6.83. The average rate over the last 10 years was 7.87.

OUTLOOK
Chinas economy becomes the first to recover from the global recession as a 4 trillion yuan ($585 billion) stimulus package takes effect. It is expected to overtake Japan as soon as end of 2010 as world second largest economy. China economy is expected to grow at rate of 10% in 2010. 2010 is termed as most "complex" year for China's economy in over a decade as the nation
faces multiple challenges in the wake of the global financial crisis. Chinas faces following

problems which need to be addressed for achieving growth rate of 10%:

China needs to encourage its domestic consumption and retool the economy away from its long reliance on cheap exports. Stimulus package as well as a record 9.6 trillion yuan (US$1.4 trillion) lending extended by banks last year triggered concerns over asset price bubbles and inflation. With development of Chinas economy in recent years major problem of income inequality surfaces in China. 10 percent of the nation's richest people enjoying 45 percent of the country's wealth, while China's poorest 10 percent had only 1.4 percent of the nation's wealth. This is leading to protest and violence across large part of country.

Restructuring the economy to achieve a better growth model for the country.

Overall Chinas economic outlook looks very bright and in coming years with help of its large manpower and high trade volume it is going to lead world economy with its own terms.

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INDIA
The economy of India is the twelfth largest economy in the world by nominal value and

the fourth largest by purchasing power parity (PPP).

India is an emerging economic power with vast human and natural resources, and a huge

knowledge base.
India had established itself as the world's second-fastest growing major economy. 2 most preferred destination for FDI. Consumption led rather

than export led growth. A middle class, whose Economic indicators size exceeds the
Nominal GDP GDP per capita GDP (real) CPI Exports Imports Trade balance Current account FDI (net) External debt Exchange rate growth USD bn USD % yoy % yoy eop USD bn USD bn USD bn USD bn USD bn USD bn USD eop

2006

2007

2008

2009e

2010f

879.2 791 9.7 6.7 123.8 184.9 -61.2 -9.3 6.8 172.1 44.0

1,131. 7 1,002 9.1 5.5 149.3 231.0 -81.7 -11.3 9.9 224.9 40.4

1,147. 9 1,000 6.1 9.7 187.9 315.1 -127.2 -36.1 23.8 224.2 49.0

1,190. 2 1,021 6.7 4.3 151.2 255.0 -103.8 -19.4 20.0 240.6 47.0

1,382. 1 1,167 7.5 4.1 180.0 285.0 -105.0 -13.0 25.0 255.6 45.0

population of the USA or the European Union, provide India with a distinct cutting edge in global competition. The Economy of India was under socialism-based policies until for an 1980s. entire The generation from the 1950s the

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economy was characterized by extensive regulation, protectionism, and public ownership, leading to pervasive corruption and slow growth. The Indian economy has undergone substantial changes since the introduction of economic reforms in 1991. These reforms were a comprehensive effort consisting of three main components namely, liberalization, privatization and globalization. Since 1991, the ongoing economic liberalization has moved India towards a capitalist market economy. It has created millions of better paying jobs and a fast-growing middle class.

GROSS DOMESTIC PRODUCT

Presently $1.217 India trillion or

nominal GDP stands at 1.96% of the world economy and it is ranked 12 t h across globe. It is the fifth largest in trillion the world with a GDP of $3.561 (2009) when measured on purchasing power parity (PPP) basis. India's economic growth accelerated to 6.7 percent yearon-year in 2009. GDP - composition by sector : Agriculture: 15.8% Industry: 25.8% 2009-10 after notching up an impressive 7.9 per cent in the previous quarter, mainly on
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Services: 58.4% (2009)

India's gross domestic product (GDP) growth slowed down to 6 per cent in the third quarter of

account of a decline in the agricultural and services sectors. Services are the major source of economic growth, accounting for more than half of India's output with less than one third of its labor force. The economy has posted an average growth rate of more than 7% in the decade since 1997. After three years of growth over 9%, India's economy expended 6.7% in 2008/09 fiscal year, weathering surprisingly well global crisis and poor monsoon. Indeed, the better than expected performance of Indian economy last year had a lot to do with a significant fiscal stimulus and loose monetary policy. In fact, two stimulus packages providing tax cuts and increasing infrastructure spending in connection with lower interest rates have supported significantly domestic demand. UNEMPLOYMENT Unemployment is one of the major concerns for the Indian Economy. As the economy is growing at very fast pace all the sectors are generating employment, moreover due to allocation of large chunk of investment education standards have improved in India. Despite the severe meltdown in global economy and consequent job losses in India since September last year, the Economic Survey has exuded optimism that there would be reduction in unemployment rate by the end of the Eleventh Five Year Plan (2007-12).Unemployment rate to fall below 5% by 2012. But during recession there was a decline in employment by 1.31 lakhs during the months of April to June 2009. On a monthly basis, the employment rate in April dropped by .38 lakhs and 1.57 lakhs in May but saw a slight rise of 0.64 lakhs in June. Export oriented sectors like the IT/BPO, textiles and gems and jewellery are among the worst hit sectors with

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decline in the employment for each sector being 0.48 lakhs, 0.23 lakhs and 1.52 lakhs respectively. STOCK MARKET The India stock market is steered on by the two exchanges viz, Bombay Stock Exchanges (BSE) and National Stock Exchange (NSE). The trade and business of the entire country is dependant on the performance of these two main stock exchanges. The 30-share benchmark index of Indian stocks, the Sensex, gained over 7,800 points in the past year to settle at 17,464.81 on December 31, 2009. Making a quick recovery from the impact of the global one downturn, of the the best Indian stocks emerged as performers in 2009 as compared to their peers from across the world including other countries. The China and sharp developed

revival in the Indian stocks have also attracted foreign investors to flock back again in the world's second fastest growing economy in the past year. The prevailing economic conditions, both domestic and global, suggest the Indian stock market is poised to continue to rally in 2010 even though U.S. and European Markets have yet to recover from recession effect. Key factor remains the impact of Q4 results and strong GDP growth of around 8%.

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INFLATION
Indias benchmark wholesale price index-based inflation rate rose to 9.89% on year in February, its fastest pace in 16 months, from a provisional 8.56% in January. Food prices articles percent. Inflation was also well above a 8.50% rate that the Reserve Bank of India has forecast by the end of March, highlighting the sharp upswing in prices as food prices pick up and India's economic recovery gathers steam. The large rise in the WPI partly reflected a comparison with depressed levels a year earlier. But prices of food, which accounts for a large weighting in the index, have been surging, after the weakest monsoon in 37 years hurt farm output. In 2009, India face negative inflation for some period of time and a very low inflation level due to decrease in global food prices and fall in oil prices. But as economy start to grow and increased gap in demand and supply inflation start to increase and going to touch double digit mark soon. Inflation is going to be major problem for Indian government in coming days. jumped rose 17.79 15.54 percent in February, while those for primary percent. Manufactured products were up 7.42

EXCHANGE RATE
The rupee is the official unit of currency of India. The issuance of the currency is controlled by the Reserve Bank of India (RBI).As on 19th March 1US $ = Rs.45.465. The Indian Rupee exchange rate for February, 2010 averaged 46.27 INR to USD. That's 37.9 basis points higher

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than the January, 2010 rate of 45.89, and 298 basis points lower than the February, 2009 rate of 49.25. Since March 2009, the rupee has been appreciating against the dollar from 51.75 rupees per dollar in mid-March 2009 to 46.29 rupees per dollar at the end of January 2010, constituting a gain of almost 12 per cent. This appreciation has been triggered by the resumption of foreign capital inflows into the country after March 2009. Before this it rose to record highs in 2007, only to lose 30% of its value in 2008 as the credit crisis exploded. It is forecasted for 2010, that Rupee will hit an average over the 12-month period of 49.05 compared to the US dollar. It is expected that by the end of March, the Indian Rupee will see a small decline, perhaps to 45.55, but it will increase to as much as 52.55.

FOREIGN DIRECT INVESTMENT

FDI in India has increased over the years due Indian government. The increased flow of FDI country's economy. India has been ranked at the third place in global foreign direct investments for 2010, following the economic
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to the efforts that have been made by the in India has given a major boost to the

meltdown, and will continue to remain among the top five attractive destinations for international investors during the next two years. India attracted FDI inflows of US$ 1.54 billion during December 2009, a 60 per cent increase over the US$ 1.08 billion achieved in same month last year. The cumulative amount of FDI inflows from August 1991 to December 2009 stood at US$ 127.46 billion. India attracted FDI equity inflows of US$ 1.54 billion during December 2009. On a cumulative basis, FDI equity inflows of US$ 20.92 billion were recorded during April-December 2009.

EXPORTS
India's exports stood at $143.3 billion, making it the 22nd -largest export economy in the world. The country's exports have grown steadily in the past few decades, ever since foreign direct investment (FDI) was allowed on a large scale, and most of the state-run industries were privatized. Exports during January, 2010 were valued at US $14343 million which was 11.5 per cent higher than the level of US $ 12869 million during January, 2009. Cumulative value of exports for the period April-2009 to January-2010 was US $ 131930 million registering a negative growth of 17.8 per cent over the same period last year. Turning positive for the first time in 13 months January 2010, the export sector rose 18.2 per cent to 14.3 billion dollars. Exports contracted 6.6% yoy in Oct 09 the smallest decline since Jan 09.India's chief exports include computer software, agricultural products (cashews, coffee), cotton textiles and clothing (ready-made garments, cotton yarn and textiles), gems and jewellery, cut diamonds, handicrafts, iron ore, jute products, leather goods, shrimp, tea, and tobacco.

IMPORTS
As the middle class of India becomes more affluent and wealthy, domestic consumption will continue to increase. To fulfill the need of all the people India import is rising for past few years. Capital goods and fuel, each account for about a quarter of Indian imports. India is poor in oil
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resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Other imports of India include edible oils, fertilizer, food grains, iron and steel, industrial machinery, professional instruments and transportation equipment. Imports during January, 2010 were valued at US $ 24705 million representing a growth of 35.5 per cent over the level of imports valued at US $ 18228 million in January, 2009. Cumulative value of imports for the period April, million 2009January, a 2010 was US $ 218534 registering negative growth of 19.7 per cent over the same period last year After bottoming in February 2009 import have start to increase. Also as Oil prices increase by 70% from February level Indias import bill related to oil also doubled. As economy is improving it is expected that import will reach to the level it has before start of recession

OUTLOOK
Over the past two decades, India has made sustained progress on a scale, size and pace that is unprecedented in its own history. The evidence demonstrates that the economy is clearly on its way to sustained growth but what is critical in the coming years is a combination of inflation control, increased consumer spending, adequate liquidity and emphasis on development of industry & educational infrastructure. In the long run, the emphasis will have to be on decreasing the amount of dependence on the services sector and taking concrete measures to develop
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agriculture in the country. This can be only possible with sound governmental reforms, increased R&D spending and adequate import of technology and training. The last fiscal and the first half of the current fiscal saw India dealing with the impact of the global slowdown that resulted in the GDP growth rate slowing down from an average of 9% achieved in the last five years to 6.7%, plummeting exports, a booming fiscal deficit and an alarming fall in the industrial production. Despite these negative impacts, when compared to the rest of the world, India (along with China) stood out as the better performer and continues to remain a primary focus for many businesses. Over the last 12 months the Indian economy has picked up steam again. The Indian GDP growth rate has sped up to a respectable 7.2%. The big question is Can the economy continues to deliver? Indias future in the coming year(s) will be determined based on interplay of a number of factors. The country is faced with very high inflation that is expected to reach double digit levels by end April 2010. The fiscal deficit (at 6.8%), coupled with a public debt to GDP ratio of almost 90% (including quasi fiscal debt), calls for immediate action.

COMPARITIVE ANALYSIS
To compare world 4 big economies and to take decision which country/region is best for investment, we are going to analyze and compare them on the basis of certain economic parameters, which will show how well country is growing and what its future prospects are.

1. GDP Growth Rate: Recent recession in 2008-09 bring forward new leaders, China and
India, in world economies that are going to drive world growth in coming years. When most of world economies are facing negative growth rate in 2008-09, these two countries are growing with rate of more than 5%. During same period US economy had negative growth rate of -2.4% and EU world biggest economy till date recorded -4.1% growth rate.
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For the past two decades, China has been growing at an astounding 9.5% a year, and India by 6%. Given their young populations, high savings China and India possess the fundamentals to keep growing in the 7%-to-8% range for decades. While US and EU are growing at rate of 2 to 3 % only. China is expected to overtake US in term of nominal GDP as early as 2020. In term of GDP Growth Rate China emerges as leader but it is closely followed by India. With view of economists across globe that China is manipulating its GDP, it is really difficult to judge which one is better India or China. But with long term perspective both of these countries have potential to maintain a very promising growth rate of more than 6%.

2. Exports: Export led growth is major indicator how a country is growing. In recent time
China has replaced both EU and USA to become world largest exporter. In 2009 China export was $1.2 tn , more than any country in world. . China's newfound status is mostly symbolic but highlights its growing presence as an industrial power and, increasingly, as an investor and key voice in managing the global economy. During period of 2007-2009, whereas China and India export are increasing that of EU and U S are decreasing. This trend is expected to continue. While India export is led by IT enabled services, engineering goods and textile. China's exports largely consist of low-value everyday goods like cheap electrical appliances and textiles, but China is aiming for a higher-value economy with higher-value exports. India export is also increasing but it is no where near to where China is. India export is nearly 1/10 of that of China. Export growth has continued to be a major component supporting China's rapid economic growth and in coming years it is going to be stronger in term of export contribution towards its GDP. So as compared to all 3 economies, China is again leader in term of this indicator.

3. IIP: Index of Industrial Production (IIP) is an index which details out the growth of various
sectors in an economy. IIP represents the status of production in the industrial sector for a given
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period of time as compared to a reference period of time. During global financial crisis industrial production declined sharply. But beginning in April/May 2009, global industrial production began recovering, initially led by accelerating growth in China following the implementation of the $575 billion (over 5 quarters) fiscal stimulus package by US.

IIP is major indicator which helps in analyzing any economy. It shows overall growth happening in Industries across that economy. As we can see from the graph that during period of 20072009, India and China have seen positive IIP while US and EU faces negative industrial production which is indicator of economy of these countries/region going into recession. Increase in IIP is indication that there is increase in trade and sales of product produce in that economy. While China maintains IIP above 10%, India IIP remain at nearly 8%. In coming years, these figures of India and China largely depend on local consumption by consumers in those countries; they cant rely on consumer in West after recent financial crisis. With rapidly increasing middle class in both these countries we can expect that these countries will maintain high level of growth in Industrial Production for coming years. While US and EU will face decrease in domestic demand and they need to tap Asian and African countries for Industrial product produced in their factories. So sudden rise in IIP of these countries is not expected and it is going to be difficult task for US and EU to match China and India in term of this parameter.

4. Inflation: Inflation and the economy of a country are closely related. Inflation not only
affects the macroeconomic indicators, it affects the living standards of the people. As the percentage of inflation increases, the cost of all commodities also increases and it has negative effect on GDP of country.

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Inflation is major problem for developing economies like China and India. Especially in India which is usually hit by supply side inflation due to its major dependency on Mansoon. As clearly visible from the graph India is having very high inflation rate compared to all other economies followed by China. But China is able to maintain it inflation level below 5% level. This high inflation pattern put pressure on central bank (RBI) to raise its interest rate to curb the rising prices. This has negative impact on investment and borrowing of loans for development purpose and ultimately GDP. This factor brings down competitiveness of India compared to other economies. In coming years if India needs to achieve high growth rate, it need to curb inflation and maintain price level at adequate level.

5.

FDI:

FDI is

i.e. direct major

Foreign Investment indicator

showing

confidence of foreign investors in countries economy. FDI help in

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boosting the confidence of investors and also contribute towards GDP. Both China and India are most preferred destination for FDI according to various analysts. In recent years after liberalization, china and India become hot destination for Investment. Most of the companies prefer to setup their plants in these two countries. But in this parameter also India lags behind China by big margin. FDI is only 0.8% of Indian GDP, while it is 4.3 % of Chinas GDP. The reason for such low FDI in India as compared to China is strong regulation by Indian government in term of percentage of investment that can be made in particular company. But in coming years more leniency by Indian government in term of regulation will increase FDI in India many fold.

6. Debt: No macro economic problem is as complex as public debt. Many countries spend a
greater proportion of their budget on debt repayment. Recent recession contributed in increasing Debt as percentage of GDP for most of the economies.

In case of US, it provided monetary stimulus to recover from recession but this measure increases its debt to record level. US debt is expected to reach 90% of its GDP by 2020.This is going to be major risk for US economy in coming time. Situation is not good for EU also; few of its economies are under severe debt pressure. Greece is looking for bailout after it debt raised to more than 100%

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of its GDP and it reach to level of default. Many other countries including Spain, Portugal are facing problem of high Debt. Condition in India and China is not that bad. India is having debt of 58% of its GDP but most of its debt is hold by its own people as compare to US where most of its debt is in hand of foreigners. China is at best position as compare to other 3 economies with debt level of less than 20%.This high debt to GDP ratio makes US and EU unfavorable location to invest in coming years.

CONCLUSION
Inspecting various economic indicators of Us, China, EU and India is pointing in direction that in coming decade China is going to big power and best destination to invest in. With its strong economic growth and large labor it will become world largest economy overtaking America. US and EU are still struggling from after shocks of recession and it will take few years for them to reach at economic level where they were before start of recession. As we have seen Public Debt is going to be major concern for US in coming days. For EU, the inequality between the economies of the region and current debt crisis will be major challenges in years to come. With so many indicators in its favor China faces few problems that could unsettle its dream of being world leader. a) China population is getting aged. It is expected that by 2040 more than 50% of chinas population will be above 60 year of age. b) Lack of English speaking people. According to 2006 census only 0.7% of China population can speak English. c) Currently China stock P/E stand at 29, which is much higher as compared to many economies. As compared to China, India is not having these problems. Its population is 10 year younger than China. 10% of Indias population can speak English and current P/E of Indian stock is 15, having much room to increase. But size of Indian economy is very small. It is presently at 1995 level of
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China economy in term of GDP. It requires many more years for India to be recognized as major economy to invest in and it can compete with China and US. So for upcoming decade China is going to be most preferred destination to invest.

PHASE II

SECTOR ANALYSIS
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AUTO INDUSTRY
The automobile industry in India is the 9th largest in the world with an annual production of over 2.3 million units in 2008. In 2009, India emerged as Asia's 4th largest exporter of automobiles, behind Japan, South Korea and Thailand. Following economic liberalization in India in 1991, the Indian automotive industry has demonstrated sustained growth as a result of increased competitiveness and relaxed restrictions. Several Indian automobile manufacturers such as Tata Motors, Maruti Suzuki and Mahindra and Mahindra, expanded their domestic and international operations. After 1970, the automotive industry started to grow, but the growth was mainly driven by tractors, commercial vehicles and scooters. Cars were still a major luxury. Japanese manufacturers entered the Indian market ultimately leading to the establishment of Maruti Udyog. A number of foreign firms initiated joint ventures with Indian companies. In the 1980s, a number of Japanese manufacturers launched joint-ventures for building motorcycles and light commercial-vehicles. It was at this time that the Indian government chose Suzuki for its joint-venture to manufacture small cars.

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The Indian automotive industry started its new journey from 1991 with delicensing of the sector and subsequent opening up for 100 per cent FDI through automatic route. Since then almost all the global majors have set up their facilities in India taking the production of vehicle from 2 million in 1991 to 10 million in 2006.The Indian automobile sector is all set to break its 10million unit sales record of 2006-07 by posting all-time high sales of 12.2 million units for the fiscal 2009-10.

Indian Automobile Industry at Global level :

World's 2nd largest manufacturer of two wheeler 5th largest manufacturer of commercial vehicles Largest manufacturers of tractors in the world 4th largest passenger car market in Asia India is the 2nd largest two-wheeler market in the world 11th largest passenger car market in the world Expected to be the 7th largest auto industry by 2016

Indian Automobile sector can be broadly classified into 2 segments: AUTOMOBILE SECTOR

COMMERCIAL VEHICLE (CV)

PASSENGER VEHICLE (PV)

2 WHEELER

3 WHEELER

4 WHEELER

COMMERCIAL VEHICLE (CV)

India is the fourth-largest CV market in the world.

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Presently, commercial vehicles account for more than 60% of the total freight movement in the country. The Indian CV industry is dominated by domestic players, with more than 90% of the total segment being held between Tata Motors, Ashok Leyland, M&M and Eicher Motors.

Increasing economic activity, especially the infrastructure, construction and mining activities, has been the principal growth drivers.

In 2008, the CV segment was hit hard due to a slowdown in the economy and industrial activities. In FY09, domestic sales in this segment dropped by 21.7% y-o-y. Financing has also

been a concern for the segment because of tight credit norms and the unwillingness of financiers to lend. The CV market in India is dominated by domestic manufacturers. The LCV and M&HCV segments both exhibit duopoly, with Tata Motors and M&M holding 88% of the LCV segment and Tata Motors and Ashok Leyland holding 88% of the M&HCV segment. The CV segments sale is impressive during February 2010 on account of the strong pick-up in industrial activities and the strong demand from the infrastructure and construction sectors. Moreover, the low base of the last year and the pre-buying on account of the implementation of the Euro IV emission norms by April 2010 led to a strong growth in the segment.

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 Passenger carrier segment

The passenger carrier segment comprises of buses used for transportation of people for both interstate and local transportation. In FY09, this segment decreased by 7% and accounted for 16% of total domestic CV sales.The exports of passenger carriers decreased by 21% as compared to the previous year.

Exports CV
Major export destinations for this segment include Bangladesh, Middle East countries, Mauritius, Nepal, South Africa, Sri Lanka and the Gulf countries. Trucks are mainly exported to Bangladesh, Nepal and Africa and passenger carriers to Sri Lanka and the Gulf countries. In FY09, LCVs accounted for an export share of 60% and M&HCVs for the remaining 40% of CV exports.

PASSENGER VEHICLE (PV)

The production of PVs in India has grown more than threefold over the last decade. India is primarily a small-car market, with more than 75% of total volume being small cars. According to estimates, by 2014 India is expected to become the sixth-largest PV market and fifth-largest PV producer in the world.

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The last five years have exceptionally wherein 11.5% during PV been good sales

for the car industry grew at a CAGR of domestically the period while

FY0509,

exports grew at a CAGR of 21% during the same period. However, toward the end of 2008, the segment started witnessing a slowdown impacted by depressed consumer sentiments and postponement of purchases due to a weak income outlook, resulting in a weak domestic demand. In FY09, domestic sales in the segment grew marginally by 0.13% yearon- year (y-o-y) to 1.6 million units. Financing has also been a concern for the segment; lending norms in relation to weak customer profiles have become more stringent. The tightening of credit norms and the repossession rule1 reinforced from January 2008 has impacted the domestic PV sales in FY09. To cushion the loss in liquidity, OEMs are teaming up with more finance companies and some are planning to set up a captive financing arm.

Exports PV
During FY09, exports accounted for 17.8% of the total PVs sold, compared to 9.2% in FY03, with small cars comprising around 90% of total passenger vehicle exports in FY09. Hyundai is the largest exporter with an export volume of 253,345 units for FY09, compared to 144,439 in FY08. Major export destinations for PVs, which accounted for more than 50% of Indias exports, included Algeria, Italy, Mexico, South Africa and Sri Lanka.

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The government of India has been promoting exports in the automobile segment through Focus Market Scheme (FMS) and Focus Product Scheme (FPS) under which automakers receive cash incentives of up to 5% upon shipping specified vehicles to specified countries, most of which are located in Africa, Eastern Europe, Latin America and the Commonwealth of Independent States.

TWO-WHEELERS
Until the late 1990s, scooters dominated two-wheeler sales, with motorcycles accounting for less than 40% share. On the back of better fuel efficiency and faster mobility, there has been a structural shift, with motorcycles holding 80% of the segment. However, with the launch of the fuel-efficient gearless scooters with contemporary technology, which target young women, teenagers and the elderly, scooter sales have been rising. The Indian domestic two-wheeler industry has grown at a CAGR of 7% during FY05-09. However, industry growth slowed down in FY08, with sales falling by 8% largely due to the credit squeeze and rising interest rates. In FY09, the industry has grown by 2.6%.
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The two-wheeler segment reported a robust set of numbers for February 2010. The segment reported a 32.8% y-o-y growth in the domestic sales and a 44% growth in the exports for the month. The overall sales in the two-wheeler segment grew by a significant 33.9% yoy to 942,048 units in February 2010. The motorcycle sales for February 2010 stood at 642,419 vehicles in the domestic market, registering a growth of 30.7% yoy. On the other hand, exports at 101,026 units indicated a growth of 43.4%.

Exports 2 Wheeler
The export of two-wheelers from India had a CAGR of 31% in FY05-09, crossing the 1 million mark in FY09. Motorcycles constitute 96.7% to the total export of twowheelers. markets The have primary been the

developing economies of South Asia and Latin America.

THREE-WHEELERS
In a developing country such as India, three-wheelers are a lowcost means of transport in cities and towns. They also enable cost-effective means of intracity transportation of goods. Sales of three-wheelers witnessed a 2% decline in FY09, with that of passenger carriers growing by 12% and goods carriers declining by 38%.

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 The performance of the three-wheeler segment has been consistently outstanding and in February 2010 the segments total sales grew by a strong 50.6% yoy. In the domestic market, the passenger sub-segments sales marked a growth of 25% while the goods sub-segment reported a growth of 58% on account of a low base of the previous year. Bajaj Autos domestic sales grew by 25% whereas its exports saw a robust growth of 103% yoy in February 2010. With this, Bajaj Autos domestic market share stood at 38.5%. M&Ms domestic three-wheeler sales grew by just 6.6% yoy on account of a subdued performance of the goods carrier segment whose sales declined by 23% yoy in the domestic markets. Piaggio Vehicles Pvt Ltd marked a robust growth of 30.3% in its domestic three-wheeler sales and with this the domestic market share of the company grew to 41.2%.

MERGER & ACQUISITIONS

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The domestic automotive sector recorded a deal value of US$3.2 billion in 2008(US$2.2 billion in 2007).

More deals were reportedly done with an objective of expansion in the global markets than for acquiring technical know-how.

The downturn in the automotive industry has had an impact on the global automotive M&A deal values as well; Global M&A activity fell by over 40% in 2008 to US$27 billion, with component supplier deal activity down by over 60%

Recent Acquisitions
Acquirer Tata Motors Target Company UK-based Jaguar and Land Rover for US$2.3 billion Ashok Leyland Czech Republicbased truckmanufacturing business of Avia for US$35 million Bajaj Auto Increased its stake to 30% in The acquisition will give the company Austriabased KTM Power access to KTMs technology and distribution network across Europe Sports
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Rationale This will enable Tata Motors to expand its automotive business across the globe (June 2008). The acquisition will enable the company to widen its geographical presence and strengthen its product range (August 2006).

(February 2009). Recent years have witnessed a spate of acquisitions undertaken by the Indian automotive companies. With an aim to expand in terms of markets and products, domestic companies have aggressively adopted the inorganic growth route by acquiring assets and companies outside of India. OEMs, including Tata Motors, M&M and Ashok Leyland, have been fairly active in acquiring companies in other geographies. The largest number of deals have taken place in the component industry space where a number of promoter-run businesses, like Amtek Group, M&M Systech,Minda Group and Sona Group, have been the frontrunners in the acquisition race.

SWOT ANALYSIS
STRENGTHS

The world's major car manufacturers continue to invest in India, with GM, VW and Toyota all investing Foreign joint ventures ensure capacity building for local partners, as overseas firms bring expertise. As compared to its competitors in west, Indian automobile sector is more cost competitive. With booming IT sector in India, automobile sector is having access to latest technology.

WEAKNESSES

Local demand is still skewed heavily towards low-cost vehicles, including scooters, due to low income levels.

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The cost of production is higher than some other Asian states, such as China, although these costs can vary from state to state according to the level of infrastructural development and electricity costs Industry has low level of research and development capability. Most component companies are dependent on global majors for technology

OPPORTUNITIES

Significant export opportunities may be realised through diversification of export basket. The premium segment is benefiting from higher levels of personal wealth, attracting investment from brands such as Audi. The commercial vehicle segment stands to benefit from a number of new joint ventures announced recently, including Mahindra and Navistar, SAIC China and GM motors. The domestic parts segment is gaining acceptance overseas. Large market for small and cheaper $2000 cars.

THREATS

The presence of a large counterfeit components market poses a significant threat. Imports pose price based competition in the replacement market.

In recent budget, Excise duty has been increased from 8 per cent to 10 per cent. This poses major threat for growth of this sector.

PEST ANALYSIS
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 POLITICAL

Indian government Auto Policy has aim to establish a globally competitive Automotive Industry in India and to double its contribution to the economy by 2010.

Establish an international hub for manufacturing small, affordable passenger cars as well as tractors and two wheelers. Allowing automatic approval for foreign equity investment up to 100 per cent, with no minimum investment criteria. Excise duty has been increased from 8 per cent to 10 per cent, which is going to impact sales in coming time. Promoting multi-modal transportation and the implementation of mass rapid transport systems.

ECONOMICAL Environment is highly advantageous as there is huge demand of automobiles in country and India is huge consumer of it currently. Automobile sector growth is directly proportion to the growth rate of the country. With Indian economy growing at rate of more than 6%, demand for vehicles going to surge.

SOCIAL Since changed lifestyle of people, leads to increased purchase of automobiles, so automobile sector has large customer base to serve. Indian customers are highly discerning, educated and well informed. They are price sensitive and put a lot of emphasis on value for money. The Automobile sector is one of the major sources of employment generation in India.
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This sector is the major contributor of the CO2 and greenhouse gas raising the global temperature and adding worries for the climate.

TECHNOLOGICAL With the entry of global companies into the Indian market, advanced technologies, both in product and production processes have developed. Govt. initiatives in establishing National Automotive Testing and R&D Infrastructure Project (NATRIP) network across the country will further lead to enhancing R&D and technological advancements. With the development or evolution of alternate fuels, hybrid cars have made entry into the market. Government initiatives regarding tax rebates have led to global players setting up their R&D centers in India.

OUTLOOK
Indian auto sector is expected to witness an overall growth in sales of 10%12% during 2010, with a faster recovery in PV volumes of 12%14%, compared with 5%6% for the commercial vehicle (CV) segment. However, the positive outlook for demand could result in a sharp increase in capital expenditure plans, which could offset the positive impact on credit profiles of higher volumes and lower inventories. Higher vehicle prices and more expensive auto loans will be the biggest deterrents to sales this year. High inflation, pushed up by food and fuel prices, could also hurt consumer confidence.

Industry highlights
Segment Domestic sales Feb 2010 Cars 153,845 % yoy 33.2 % YTD 25.6 Exports Feb 2010 36267.0 % yoy 39.2 % YTD 34.9
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UV/MPVs CV: M&HCV LCV Two-wheelers: Scooters Motorcycles Mopeds Three-wheelers

40,703 58,024 28,099 29,925 837,653 145,857 642,419 49,377 39,558

37.2 87.1 116.9 65.7 32.8 44.7 30.7 32.5 31.9

27.9 35.5 28.2 42.3 24.6 22.9 24.9 31.8 26.3

417.0 4320.0 1741.0 2579.0 104395.0 2613.0 101026.0 756.0 19842.0

94.0 114.2 60.8 176.1 44.0 116.8 43.4 -11.9 110.0

-0.5 -1.3 17.3 -13.1 11.6 20.5 11.6 -18.7 11.7

Although domestic sales volumes are expected to recover, exports may continue to be an area of concern, due to the slowdown in global automotive markets and the expiry of scrap page incentives for replacing older vehicles. PV sales began to improve from June 2009, and CVs from October 2009. The PV rebound has been supported by an improving liquidity scenario and restoration of consumer confidence. Modest growth in industrial production, together with the government stimulus, has brought about stability in CV sales, although at lower levels than for PVs.

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Pharmaceutical Sector

Indias domestic pharma industry is worth USD 10 billion ranking 3rd in terms of volume and 13th in terms of value globally (with a share of 2% in the global sales). Ranbaxy is the leading pharmaceutical company in India with sales of Rs. 4,293.02 crores in FY 08 and is set to be acquired by Daiichi Sankyo by March 09. In FY 09, Indian pharmaceutical exports to the rest of the world augmented by 8.34% to US $8.34 bn with USA accounting for almost 19% of total exports becoming the top export destination.

India has the highest number of plants certified by the US FDA outside the US (75). By 2010, Indian pharma market will rank tenth in the world among top ten pharma markets. Overall the Indian pharma sector is projected to grow to USD 25 bn by 2010 whereas the domestic market is likely to increase to more than triple at a CAGR of 16.24% to USD 20 bn by 2015.

Contract manufacturing and contract research are expected to grow to touch USD 2.46 billion and USD 1.5 billion by the year 2010.

INTRODUCTION
Over the years the pharmaceutical industry worldwide has recognized that the worlds emerging economies are the most promising markets in the industry. And one such developing economy is India. Pharmaceutical Industry in India is one of
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the largest and most advanced among the developing countries. It accounts for 10% of worlds production. The industry is typically growing at around 1.5-1.6 times the countrys gross domestic product (GDP) growth. Indian Pharmaceutical Industry has attained wide ranging capabilities in the complex field of drug manufacture and technology. Around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and vaccines is met by Indian pharmaceutical industry. A number of Indian pharmaceutical companies adhere to highest quality standards and are approved by regulatory authorities in USA and UK. Pharmaceutical production costs are almost 50 percent lower in India than in Western nations, while overall R&D costs are about one-eighth and clinical trial expenses around one-tenth of Western levels. India's long-established manufacturing base also offers a large, well-educated, English-speaking workforce, with 700,000 scientists and engineers graduating every year, including 122,000 chemists and chemical engineers, with 1,500 PhDs

INDUSTRY STRUCTURE The Pharmaceutical industry in India is fragmented with over 3,000 generic manufacturers. small/medium The top sized ten pharmaceutical

companies including Ranbaxy, Cipla, Dr.Reddys labs, Lupin, Sun pharma, Aurobindo, Piramal, GlaxoSmithKline, Cadila and Glenmark pharma dominate the Indian pharma scene with a

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collective market share of more than 30%. It has

with annual sales.

Leading players

over 20,000 units out of which 300 units are in the organized sector; while others exist in the small scale/unorganised sector. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. There are also 5 Central Public Sector Units that manufacture drugs. These companies are: Indian Drugs & Pharmaceuticals Hindustan Antibiotics Ltd. Bengal Chemical and Pharmaceuticals Ltd. Bengal Immunity Ltd. Smith Stanistreet Pharmaceuticals Ltd.

EXPORTS
India's exports of drugs, pharmaceuticals and fine chemicals grew by 29 per cent in 2008-09 to US$ 8.25 billion compared to 2007-08. The Indian pharmaceutical sector has emerged as one of the major contributors to Indian exports with export earnings rising from a negligible amount in the early 1990s to US$ 6.08 billion by 2007-08.

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The Indian pharmaceutical companies have been doing extremely well in developed markets such as US and Europe, notable among these being Ranbaxy, Dr. Reddys Labs, Wockhardt, Cipla, Nicholas Piramal and Lupin. India is also a destination for a large and growing volume of outsourced production and R&D by Multinational Pharmaceutical Companies (MPCs). Over 60% of India's bulk drug production is exported. Key factors that make India an attractive outsource destination include its lower costs of production and R&D, the highest number of plants certified by the US FDA outside the US (75), and highly skilled professionals. Pharmaceutical exports will grow at a compound annual growth rate (CAGR) of 18.5 per cent between 2007-08 and 2011-12. This growth will be fuelled by multi-billion dollar patent expirations and growth in the global generics market. Several benefits are declared to pharma industry in Foreign Trade Policy, this include: (i) Additional resources have been made available under the Market Development Assistance Scheme and Market Access Initiative Scheme. (ii) Incentive available under Focus Market Scheme has been raised from 2.5 per cent to three per cent.

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(iii)

Incentive under Focus Product Scheme has been raised from 1.25 per cent to two per cent.

(iv)

Zero duty has been introduced under EPCG Scheme for aiding technological upgradation for pharma sector.

With the demand of generic medicines expected to rise due to regulatory framework being favorable in US and European Union and patents worth USD 80 billion expiring by 2012, will make India the key beneficiaries of the growth of the generics segment. Pricing pressures and shrinking margins in the generics space and the increasing litigation instances in the US have compelled Indian companies to consider opportunities beyond the US. Exports to Europe are likely to grow with a healthy CAGR of 32% to reach USD 1.8 billion by 2010-11. Indian companies have been strengthening their focus on the EU market.

MERGER & ACQUISITION

The Indian Pharmaceutical industry is a favorite one when it comes to cross border M&A. This is hugely due to the fact that such takeovers are beneficial in-house quick growth strategies. The desire to gain foothold in the market of another country is another major reason behind such mergers. Such transactions help the company save itself from the pain-staking procedure of establishing a novae entity in an alien country. Entry into a domestic market is a key driver of cross-border mergers. It helps companies save significant time that may be needed to build the green-field businesses of similar scale. At times M&A also cater as ego enhancers of MNCs. Other factors associated to such transactions include lack of research and development, productivity, expiring patents and generic competition. The Indian pharmaceutical industry is known for its generics, cost effectiveness and competitiveness5. The nature of diseases in India is varied and the market is ever expanding. Large global pharmaceutical companies aim towards establishing a low-cost base out of the country. A number of Indian companies have made acquisitions in the global market. With domestic drug sales of almost $5bn, Indian companies have also developed a considerable service industry for the global pharmaceutical market.
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Approximately 32 cross border transactions worth $2000mn have been executed by domestic pharmaceutical companies. There are likely to be more acquisitions in regulated markets in the US and Europe. A few examples of outbound M&A are illustrated in the following table:
Sr. No.Company (Acquirer)Company (Target) For Amount Segment Involved 1.Biocon Axicorp (German) $ 30 million Biosimilars 2.Dr. Reddys Labs Trigenesis Therapeutics (USA)$ 11 million Speciality Drugs 3.Wockhardt Esparma (German) $ 11million Branded Generics 4-Wockhardt C. P. Pharmaceuticals (UK) Rs. 83 crore Healthcare Products 5.Wockhardt Negma Laboratories (France) $ 265 million R&D 6.Wockhardt Morton Grove Pharma (USA) $38 million Liquid Generics 7.Zydus Cadilla Alpharma (France) 5.5 million EurosFormulation Business 8.Ranbaxy RPG Aventis (France) $ 70 million Generic Drugs 9.Nicholas Piramal Biosyntech (Canada) $4.85mn Regenerative-Heel Pain

Nevertheless, in the last two years, there has been a slow down in the out-bound M&A and more MNCs are being seen acquiring Indian Pharmaceutical Companies. This is mainly done to gain access to the generic drug market. Now the Indian companies face a threat of takeover under the new IPR regime which makes product patents finally available for the Indian Pharmaceutical industry. The advent of pharmaceutical product patent recognition in January 2005 changed the ground rules for Indian companies. The year 2009 saw the biggest merger in the generic market when Japans 3rd largest drug maker Daiichi Sankyo took over Indias Ranbaxy Laboratories. Daiichi purchased 63.9% of the stake at Ranbaxys for $4.2 billion.

DOMESTIC MARKET
Some of the Indian pharma companies (eg Cadila Healthcare [Cadila], Glenmark Pharma [Glenmark], Ipca Laboratories [Ipca]) had gradually reduced their presence in the domestic market as they expanded in the other geographies. However, this trend appears to have reversed over the past few quarters, as domestic pharma is once again gaining traction through new product launches and sales force expansion. Global players are also carving their niche through market acquisitions, collaborations or by setting up subsidiaries.

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According to estimates, rural areas account for 21 per cent of the country's pharmaceuticals market. In 2006-07, the rural Indian pharmaceuticals market was estimated at around US$ 1.4 billion, having grown at about 40 per cent in 2006-07 against 21 per cent in the previous year. The domestic pharma market will outshine the global market, growing at a compounded annual rate of 12-15 per cent as against a global average of 4-7 per cent during 2008-2013, according to a study by market research firm IMS. The Indian drug retail market grew by a 29.24 per cent in value terms in October 2009 over the same period a year ago. This is more than double the average monthly revenue growth rate of 13-14 per cent posted in the recent past, as per market research firm ORG IMS. Domestic sales witnessing a recovery in FY2010 Various socio-economic factors such as rising income levels, increasing affordability, gradual penetration of health insurance and the rise in chronic diseases would see the Indian formulation market touch US$ 13.7 billion by 2013, at a CAGR of 12.2 per cent over the period from fiscal year 2008 to 2013 (estimated).

Budget 2010
Proposals

Increase in weighted reduction from 150% to 200% on expenditure incurred on in-house R&D activities and from 125% to 175% on activities outsourced to specific institutions. Partial roll-back in Excise duty from 8% to 10% (to impact raw material costs).

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Impact: Neutral The increase in weighted reduction on R&D activities is a positive for the industry and would continue to support higher investments by research-led pharmaceutical companies in areas of NCE/NDDS related R&D activities. The move is likely to be positive for contract research organisations as well. The increase in excise duty for raw material would impact the cost structure in the industry. Also increase in petrochemical prices may impact some of the basic raw material (intermediate) costs, impacting margin. The increase in MAT rate is however going to increase tax outgo for few companies which are currently paying lower taxes.

SWOT Analysis Strengths

India with a population of over a billion is a largely untapped market. In fact the penetration of modern medicine is less than 30 per cent in India. To put things in perspective, per capita expenditure on health care in India is $93. The growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centers. This opens a huge market for lifestyle drugs, which has a very low contribution in the Indian markets. Indian manufacturers are one of the lowest cost producers of drugs in the world. With a scalable labor force, Indian manufactures can produce drugs at 40 per cent to 50 per cent of the cost to the rest of the world. In some cases, this cost is as low as 90 per cent. Indian pharmaceutical industry posses excellent chemistry and process reengineering skills. This adds to the competitive advantage of the Indian companies. The strength in chemistry skill help Indian companies to develop processes, which are cost effective.

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 Knowledge based low-cost manpower in science and technology is easily available in India which is contributing to growth of this sector. Government policies are continuously liberalized to attract more FDI in this sector.

Weakness
The Indian pharma companies are marred by the price regulation. Over a period of time, this regulation has reduced the pricing ability of companies. Indian pharma sector has been marred by lack of product patent, which prevents global pharma companies to introduce new drugs in the country and discourages innovation and drug discovery. Indian pharma market is one of the least penetrated in the world. To put things in to perspective, India accounts for almost 16 per cent of the world population while the total size of industry is just 1 per cent of the global pharma industry. Due to very low barriers to entry, Indian pharma industry is highly fragmented with about 300 large manufacturing units and about 18,000 small units spread across the country. This makes Indian pharma market increasingly competitive. The industry witnesses price competition, which reduces the growth of the industry in value term. Major disadvantage of Indian pharma sector is low investment in R&D which is barrier in its growth. With weak laws in country, Pharma sector is facing severe problem of duplicate drugs, which are affecting market share of market players.

Opportunities
The migration into a product patent based regime is likely to transform industry fortunes in

the long term. The new patent product regime will bring with it new innovative drugs.
Large number of drugs going off-patent in Europe and in the US offers a big opportunity for

the Indian companies to capture this market. Since generic drugs are commodities by nature,

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Indian producers have the competitive advantage, as they are the lowest cost producers of drugs in the world. Opening up of health insurance sector and the expected growth in per capita income are key growth drivers from a long-term perspective. This leads to the expansion of healthcare industry of which pharma industry is an integral part. Being the lowest cost producer combined with FDA approved plants; Indian companies can become a global outsourcing hub for pharmaceutical products.

Threats:

Threats from other low cost countries like China and Israel exist. However, on the quality front, India is better placed relative to China. So, differentiation in the contract manufacturing side may wane.

Small number of discoveries in new drugs preventing much needed growth in this sector. Indian pharma exporters are also facing serious threat from Non-tariff barriers imposed by developed countries. Also stringent registration procedures preventing many drugs manufacturer from opening their business in India.

PEST ANALYSIS
Political Factors
In Pharma industry there is a huge PSU segment which is chronically sick and highly inefficient. On a long term basis this has made practically everybody inefficient.

The Government provides extra drawbacks to some units located in specified area, providing them with subsidies that are unfair to the rest of the industry,
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bringing in a skewed development of the industry.

During budget 2010, Support for R&D, boost infrastructural development, improve access to medicines, provide SOPs, reduce taxes and duties were expected. But these are ignored by the government.

Economic Factors

India spends a very small proportion of its GDP on healthcare (mere 2%). This has stunted the demand and therefore the growth of the industry. Per capita income of an average Indian is low (Rs 38,970), therefore, spending on the healthcare takes a low priority. The incidence of Taxes is very high. On an average various taxes amounts to no less than 40-45% of the costs. The number of Registered Medical practitioners is low. As a result the reach of Pharmaceuticals is affected adversely. An adequate storage and transportation facility for special drugs is lacking. A study had indicated that nearly 60% of the Retail Chemists do not have adequate refrigeration facilities and store drugs under sub-optimal conditions.

Socio-cultural Factors
Poverty and associated malnutrition dramatically exacerbate the incidence of Malaria and TB, preventable diseases that continue to play havoc in India decades after they were eradicated in other countries.

In India people prefer using household treatments handed down for generations for common ailments. Early child bearing affects the health standards of women and children. People dont go in for vaccination due superstitious beliefs and any sort of ailment is considered as a curse from God for sins committed.

Technological Factors
Advanced automated machines have increased the output and reduced the cost. Computerization has increased the efficiency of the Pharma Industry.
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Advances in Bio-technology, Stem-cell research have given India a step forward. Humano-Insulin, Hepatitis B vaccines, AIDS drugs and many such molecules have given the industry a pioneering status. Newer drug delivery systems are the innovations of the day.

OUTLOOK
The Indian Pharmaceutical Sector is expected to remain stable in 2010, with demand benefiting from rising global acceptance of generic pharmaceuticals. India is expected to host 30% of the world's contract research within the next 10-15 years, driven by the attractions of low cost and high quality standards. Also with its intrinsic competitive advantages it remains as one of the most preferred outsourcing destinations and is now playing a vital role in manufacturing as well as drug development value chain of various innovator companies. The dream of Indian pharmaceutical companies for marking their presence globally and competing with the pharmaceutical companies from the developed countries like Europe, Japan, and United States is now coming true. The new patent regime has led many multinational pharmaceutical companies to look at India as an attractive destination not only for R&D but also for contract manufacturing, conduct of clinical trials and generic drug research. India is holding a major share in world's contract research Clinical Research Outsourcing (CRO), a budding industry valued over US$ 118 million per year in India, is estimated to grow to US$ 380 million by 2010, as MNCs are entering the market with ambitious plans. The future of Indian pharmaceutical sector is very bright because of the following factors: Clinical trials in India cost US$ 25 million each, whereas in US they cost between US$ 300-350 million each. Indian pharmaceutical companies are spending 30-50% less on custom synthesis services as compared to its global costs.
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In India investigational new drug stage costs around US$ 10-15 million, which is almost 1/10th of its cost in US (US$ 100-150million).

But with these bright spots there remain few issues which needed to be addressed like: Complex distribution system: The domestic drug distribution system is multi-layered, fragmented and controlled by strong industry unions. Over the years, fragmentation of the distribution channel has increased. Diverse market and managing rural penetration: There is a wide disparity in living standards and infrastructure development across India and demand scenario differs significantly from region to region, making it a very complex market to enter. Evolving regulatory infrastructure: The introduction of product patents in India in 2005 has opened up the market for patented launches. However, the overseas players continue to believe that India's IP and regulatory system needs to be further strengthened. Brand visibility: The domestic drug market is extremely competitive with often ten or more brands existing for the same molecule. In such a market, brand allegiance by doctors is not easy. Brand building and loyalty is therefore a critical and challenging exercise in India. Uncertainty in pricing policies: The government needs to take the final call on the proposed Pharmaceutical Policy, which seeks to increase the scope of essential drugs under the purview of the DPCO from the current 74. This is expected to bring more clarity on the pricing scenario for companies operating in this market

These are few challenges which needed to be addressed but overall scenario for pharma sector in India is looking bright. With export figures going up and domestic demand increasing, lots of new opportunities are arising for this sector.

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PHASE III

COMPANY ANALYSIS

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Industry: Pharmaceuticals
ISIN No BSE Code NSE Code INE376G0101 52Week 3 High 532523 BIOCON 52Week Low P/BV

Chairman & Managing director: Kiran Mazumdar-Shaw

68 Book .7 Value 0 10 136 EPS .1 9 311 4.42 Face Valu 5.00 e P/E 29.81

Mark Div 0. et 61876 mn Yield 99 Cap.

Biocon Limited (Biocon) is a healthcare company based in India. It is leading biotechnology enterprise, manufacturing fermentation-based of established in 1978.The company is engaged in the biotechnological technology. The products in the pharmaceutical through company is headquartered at Bangalore, India and employs approximately 3,572 people. The company serves partners and customers in over 50 countries. Within the biotechnology space, the company ranks first in Asia in terms of revenues and market capitalisation and sixteenth globally. Biocon went for an IPO in 2004.

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Biocon became only the second Indian company to cross a market capitalisation of one billion U.S. $ on the first day of listing.

Biocon is India's first biotechnology company, established in 1978. Biocon is the country's first biotechnology company to export microbial enzymes to USAand Europe.

Biocon is the first biotechnology company to receive ISO 9001 certification in India. Syngene, a Biocon subsidiary, is the country's first biotech custom research company in drug discovery

Biocon is the first Indian company to be approved by US FDA for the manufacture of pplovastatin, a cholesterol-lowering molecule.

Biocon's subsidiary, Clinigene, has India's first CAP (College of American Pathologists) accredited clinical research laboratory

Biocon is the first company to manufacture human insulin using a Pichia expression system

ABOUT SECTOR
Indias domestic pharma industry is worth USD 10 billion ranking 3rd in terms of volume and 13th in terms of value globally (with a share of 2% in the global sales). Pharmaceutical Industry in India is one of the largest and most advanced among the developing countries. It accounts for 10% of worlds production. The industry is typically growing at around 1.5-1.6 times the countrys gross domestic product (GDP) growth. A number of Indian pharmaceutical companies adhere to highest quality standards and are approved by regulatory authorities in USA and UK. The Pharmaceutical industry in India is fragmented with over 3,000 small/medium sized generic pharmaceutical manufacturers. The top ten companies including Ranbaxy, Cipla, Dr.Reddys labs, Lupin, Sun pharma, Aurobindo, Piramal, GlaxoSmithKline, Cadila and Glenmark pharma dominate the Indian pharma scene with a collective market share of more than 30%. It has over
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20,000 units out of which 300 units are in the organized sector; while others exist in the small scale/unorganised sector. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share.

Investment Rationale
Biocon Biopharmaceuticals Private Limited becomes wholly owned subsidiary: Biocon

announced that its subsidiary company Biocon SA., has entered in to a definitive agreement to acquire the 49% equity stake held by CIMAB SA in Biocon Biopharmaceuticals Private Limited (BBPL). BBPL will now become a wholly owned subsidiary of Biocon Limited. This move allows the two parents Biocon and CIMAB to focus on the joint development of novel biologics led by its most promising program T1h (anti CD6 Monoclonal antibody) which has just entered phase III Clinical trials in Psoriasis.
Biocon's subsidiary to collaboration with US-based Endo Pharmaceuticals: Biocon's

subsidiary Syngene International has entered into a discovery and development collaboration with US-based Endo Pharmaceuticals to develop novel biological therapeutic molecules against cancer. As per the agreement, Endo will retain all rights to the molecules developed, while Syngene International will receive research fees, milestone payments and success fees from Endo. Through this partnership, Syngene International and Endo Pharmaceuticals are hoping to leverage their synergistic capabilities and innovate novel therapeutic molecules for a robust cancer pipeline.
Biocon enters in to strategic tie up with diabetes monitoring: The company and Bayer

Healthcare -- a subsidiary of Bayer AG and one of the world's leading, innovative companies and medical products industry -- have entered into strategic partnership to fight the diabetes menace in India.

Financial Analysis
Sales
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The company has achieved a CAGR of 63.19% in net sales since FY 07. Net sales in FY 09 were 52.66% higher at 16086.72 mn compared to previous year 10537.54mn. Biocon has consistently increased their Net Sales over a period of time in an effort to meet the huge domestic demand and raise its market share.

Profits
Operating profit increase by 8.29% during FY09 due to increase in Companys revenue by 52%. During the year operating by 70% profit expenses whereas stood at increased 52%.

operating income increased by only Operating 323.33 Cr. Adjusted PAT has shown growth rate of 13.71% on YoY basis, better than Operating profit on account of higher other income of 64.53 Cr.

Earning
Earnings per Share for the year 2009 work out to Rs. 12.02 as compared to Rs. 21.13 in the previous year. Cash Earnings per Share for the current year work out to Rs. 77.69 as compared to Rs. 81.58 in the previous year.

DIVIDEND
In July 2009, Company had paid dividend of Rs. 3 per equity share of Rs. 5 each. This is low as compare to dividend of Rs 5 given previous year. Low dividend in FY09 can be attributed to low PAT reported by company
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MARGINS
OPM fall down by 29.36% for FY09 as compared to FY08. It is standing at 20.10 as compared to 28.34 in past year. Decrease can be contributed to higher increase in expenditure as compare to Revenue. NPM also shown fall of 25.51% for FY09.

Quarterly Analysis
In Q3FY10, sales grew by 45.40% to Rs 637.00 cr on yo-y basis as compared to previous year and Adjusted PAT grew by around 9.10% to Rs 80.84. This is mainly due to a major contribution by Axicorp (66% y-o-y growth), around 40% growth in biopharma business (all segments in biopharma insulin, immunosuppressant, and statin had shown very good results) and decent growth led by contract research business. During the Q3FY10, API registered robust sales in developed markets. Branded formulations and insulin contributed significantly to the total revenues while capturing major share in the domestic market. The company has been able to maintain its margin trajectory intact. Operating profit margins advanced at 12.61% from just preceding quarter while net profit margins remained flat at 12.7%. EPS for the December 2009 quarter stood at Rs.4.04.

PROFIT AND LOSS

YEARLY QUARTERLY
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Particulars

FY07

FY08

FY09

Q3FY 09 4380. 90

Q4FY 09 4680. 70 6.84

Q1FY 10 4984. 50 6.49 3945. 50 1039. 00 13.48 20.84 68.40 1107. 40 0.63 324.4 0 783.0 0 56.20 726.8 0 137.3 0 589.5 0

Q2FY 10 5810. 90 16.58 4669. 10 1141. 80 9.89 19.65 112.6 0 1254. 40 13.27 350.6 0 903.8 0 52.30 851.5 0 93.90 757.6 0

Q3FY 10 6370. 00 9.62 5084. 20 1285. 80 12.61 20.19 45.40 1331. 20 6.12 359.6 0 971.6 0 27.20 944.4 0 112.0 0 832.4 0

Sales

9857.31

10537.94 6.90

16086.72 52.66 12853.13

Growth (%) Total Expenditure(Cash ) Operating Profit

7022.48

7551.95

3409. 70 971.2 0

3765. 10 915.6 0 -5.72

2834.83

2985.99 5.33

3233.59 8.29 20.10 645.53

Growth (%) OPM Other Income 28.76 38.18

28.34 364.11

22.17 143.2 0 1114. 40

19.56 184.9 0 1100. 50 -1.25

EBIDT

2873.01 29.15 667.09

3350.10 31.79 940.81

3879.12 24.11 1102.52

EBIDT margin Depreciation

270.9 0 843.5 0 36.30 807.2 0 58.00 749.2 0

306.2 0 794.3 0 61.30 733.0 0 15.80 717.2 0

EBIT

2205.92 97.56 2108.36

2409.29 101.80 2307.49

2776.60 176.62 2599.98

Interest Profit before Tax & Extraordinary items Tax

169.12

128.88

118.38

PAT

1939.24

2178.61

2481.60

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Share of associate Minority Interest Adjusted PAT

0.00 61.77 1877.48

0.00 65.23 2113.38

7.20 71.31 2403.09

4.40 4.80 740.0 0

1.10 82.80 663.1 0 10.39

0.90 13.10 575.5 0 13.21 0.00 575.5 0

1.00 16.60 741.9 0 28.91 0.00 741.9 0

0.00 23.50 808.9 0 9.03 0.00 808.9 0

Growth (%)

12.57

13.71

Exceptional item

0.00

2393.65

-1471.89

458.0 0 282.0 0

414.3 0 248.8 0

Reported PAT

1877.48

4507.04

931.21

NOTE: As the company has not declared their annual result till date, data till last financial year has been taken into consideration. Moreover, latest quarter result has been compared with previous quarter result and same quarter result in last financial year.

Ratios
Particulars EPS (Annualized) CEPS RONW BV Sales to Equity Debt To EQ Interest Coverage Ratio ROCE FY07 18.77 25.45 17.57 106.86 19.71 0.17 22.61 17.57 FY08 21.13 30.54 14.24 148.41 21.08 0.17 23.67 13.85 FY09 12.02 17.53 15.91 75.54 16.09 0.35 15.72 13.65 82 | P a g e

ROE Equity Turnover Asset Turnover Current Ratio

3.75 19.71 0.63 1.93

4.23 21.08 0.51 1.78

2.40 16.09 0.63 1.81

OUTLOOK
With large number of drugs going off-patent in Europe and in the US, Biocon is having good opportunity. Also with increasing R&D works, continuous marketing of portfolio of insulin preparations in emerging markets and entering the Malaysian market would be the key growth drivers for Biocon Ltd in the forthcoming future. Biocon being strong player in the global statins market is expected to gain with rise in statin demand. It has also been expanding its product portfolio into bio-pharma products, such as immunosuppressant and insulin, in the semiregulated markets. recent launches by the company like Basalog and Mycophenolate Mofetil would add to the revenue of the company As of December 2009, India and the emerging markets accounted for 40 per cent of consolidated revenues. Further, the company is certainly looking at acquisitions in many ways along with a plan of floating its research services division in a separate entity. Company fundamentals look strong and it is expected to grow at much better as compared to other companies in this sector.

GLAXOSMITHKLINE
Industry: Pharmaceuticals INE159A0101 52Week ISIN No 6 High 52Week BSE Code 500660 Low P/BV NSE Code GLAXO 1929 1000 9.14 Chairman / Chair Person: D S Parekh Book 207.68 Face Value 10.00 Value EPS 60.48 P/E 31.38 Div Yield 1.58 Market Cap. 16077.0 6

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Established in the year 1924 in India GlaxoSmithKline Pharmaceuticals Ltd. (GSK Rx India) is one of the oldest pharmaceuticals company. GSK Pharma is the largest pharma company in the domestic pharma market. It is a 51% subsidiary of the US$ 46 bn Glaxo Group,the world's second-largest pharma companywith an R&D warchest of US$ 6.8 bn. The company has introduced 3 vaccines and 2 pharmaceutical products in 9MCY09 and it has got very good response for Rotarix and Cervarix vaccine. In India, GSK is one of the market leaders with a turnover of Rs. 1859 crore and a share of 5.3 per cent GSK has seven products in the top 50 brands, and the top five GSK products are Augmentin, Calpol, Ceftum, Phexin, and Betnesol GSK leads in several therapeutic segments - dermatology, antihelmentics, hormones, and antiinfectives GSK Indias R&D centres at Thane and Nashik have been granted recognition by the Department of Scientific and Industrial Research, Government of India

ABOUT SECTOR
Indias domestic pharma industry is worth USD 10 billion ranking 3rd in terms of volume and 13th in terms of value globally (with a share of 2% in the global sales). Pharmaceutical Industry in India is one of the largest and most advanced among the developing countries. It accounts for 10% of worlds production. The industry is typically growing at around 1.5-1.6 times the

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countrys gross domestic product (GDP) growth. A number of Indian pharmaceutical companies adhere to highest quality standards and are approved by regulatory authorities in USA and UK. The Pharmaceutical industry in India is fragmented with over 3,000 small/medium sized generic pharmaceutical manufacturers. The top ten companies including Ranbaxy, Cipla, Dr.Reddys labs, Lupin, Sun pharma, Aurobindo, Piramal, GlaxoSmithKline, Cadila and Glenmark pharma dominate the Indian pharma scene with a collective market share of more than 30%. It has over 20,000 units out of which 300 units are in the organized sector; while others exist in the small scale/unorganised sector. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share.

Investment Rationale
GlaxoSmithKline eyes Dr Reddy`s Laboratories: The company has emerged as

frontrunner for a phased buy-in to Dr Reddy`s Laboratories. A transaction could spark a fresh wave of foreign deals in India`s drugs sector. While nothing is finalized, one possibility is that Glaxo will take a 20% stake in Dr Reddy`s Holdings, a family vehicle that in turn owns 23.2% of the drug maker. It is believed that this would give Glaxo a stake of just under 5%, worth around USD 165 million. But the British company could also get right of first refusal on the family`s remaining holding.
GSKs Cervarix blocks cervical cancer virus: The US Food and Drug Administration

(USFDA) have announced that Cervarix from Glaxo Smith Kline (GSK) was effective in blocking the cervical cancer virus. The vaccine blocked the Human Papilloma Virus (HPV) about 93% of the time with some minor side effects. The agency is going to consult a team of professionals to seek their opinion on whether to approve the vaccine for female consumers falling in the age group of 10-25 years. If the company receives approval for Cervarix then it will end the two years wait of the British drug-maker to introduce this vaccine in American markets. The vaccine has already been approved in around 100 countries across the globe.

Financial Analysis
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Revenue
The company has achieved a growth rate of 20.59% in revenue since FY 06. Net sales in FY 09 were 12.66% higher at 1907.76 Cr compared to previous year 1693.41 Cr. Top-line growth was driven by the Vaccine and Dermatology Segments. Also the launch of the anti-fungal antibiotic, Mycamine and Dermatology products from the Sitefel basket help in increase of revenue.

Profits
Operating profit of GlaxoSmithKline rises to 674.1 Cr in FY09 as compared to 595.38 year earlier, rise of 13.1%. CAGR for operating profit during FY09 and FY06 is 7%. Adjusted PAT has shown growth rate of 8.05% on YoY basis, this is low as compared to previous year growth rate of 13% Adjusted PAT is standing at 500.16 Cr.

Earning
Earnings per Share for the year FY09 stands at healthy rate of 59.05 which is very healthy as compared to industry standard of 21.85 only. It has risen to 5 bps as compare to level of 54.65 of FY08. Cash Earnings per Share(CEPS) which is adjusted for depreciation work out to 61.02 for the current year as compared to Rs. 56.58 in the previous year.

DIVIDEND
In July 2009, Company had paid dividend of Rs. 31 per equity share of Rs. 10 each. This is low as compare to dividend of Rs 40 given previous year which compromise of Rs 22 dividend and special dividend of Rs18. Company is giving average dividend of Rs 30 for past 5 FY.

MARGINS
GlaxoSmithKline is able to maintain steady OPM for past 5 FY. OPM for FY09 stands at 35.33 as compared to 35.16 in FY08. NPM has shown a slight fall to 26.22 Cr as compared to 27.33 Cr. This minor decrease can be attributed to decrease in interest expense of company.

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Quarterly Analysis
GlaxoSmithKline Pharmaceuticals Limited has registered Sales increase by 21.5% and Adjusted Profit after Tax has grown by 50.97% for Q4FY10. The sales growth of 21.5% was broad based across all therapeutic segments and, in particular, the Vaccines range and the Dermatologicals franchise recorded strong growth. The improvement in product mix has resulted in better gross margins of 21%. Expense growth of 8% was largely due to field force expansion, and the investments in promotion activities and training, which are expected to accelerate in the coming months. During the quarter, the Company launched Mycamine an antifungal antibiotic, in-licensed from Astellas, Japan. The Company has also launched the Stiefel range of products in Cosmetic dermatology therapies, which has significantly strengthened the Companys presence in the dermatologicals segment.

PROFIT AND LOSS

YEARLY
in Cr 31Mar06
1581.97 31-Mar07 31-Mar08 31-Mar09

QUARTERLY
Q4FY 09 460.9 8 Q1FY 10 461.9 5 0.21 299.9 5 161.0 3 302.4 3 159.5 2 -0.94 Q2FY1 0 518.2 8 12.19 330.9 7 187.3 1 17.42 Q3FY 10 449.8 0 13.21 315.5 4 134.2 6 Q4FY 10 546.5 0 21.50 341.0 1 205.4 9 53.05

Sales

1608.2 0 1.66

1693.41

1907.76

Growth (%)

5.30

12.66

Total Expenditure Operating Profit

1066.05

1053.0 1 555.19

1098.03

1233.66

515.92

595.38

674.10

Growth (%)

7.61

7.24

13.22

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28.32
OPM Other Income EBIDT 32.61 134.13 650.05 34.52 156.58 711.77 35.16 174.52 769.90 35.33 140.79 814.89

34.93 26.21 194.5 8

34.53 18.00 185.3 6 -4.74

36.14 0.00 195.1 2 5.27 3.99 191.1 3 5.36 -16.84 207.9 7

29.85 0.00 143.8 4 26.28 4.75 139.0 9 27.23 19.47 158.5 6

37.60 18.00 223.5 6 55.42 3.76 219.8 0 58.03 20.34 240.1 4

EBIDT margin

41.09

44.26

45.46

42.71

Depreciation EBIT

20.07 629.98

20.53 691.24

16.33 753.57

16.66 798.23

3.67 190.9 1

3.96 181.4 0 -4.98

EBIT Margin

39.82

42.98

44.50

41.84

Interest

63.65

63.72

52.56

37.37

0.00 190.9 1

19.39 200.7 9

Profit before Tax & Extraordinary items Tax PAT

566.33

627.52

701.01

760.86

199.12 367.21

217.92 409.60

238.13 462.88

260.70 500.16

65.48 125.4 3 0.00 0.00 125.4 3

69.21 131.5 8 0.00 0.00 131.5 8 4.90

67.06 140.9 1 0.00 0.00 140.9 1 7.09

51.80 106.7 6 0.00 0.00 106.7 6 24.24

78.96 161.1 8 0.00 0.00 161.1 8 50.97

Share of associate Minority Interest Adjusted PAT

0.00 0.00 367.21

0.00 0.00 409.60

0.00 0.00 462.88

0.00 0.00 500.16

Growth (%)

11.54

13.01

8.05

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Exceptional item Reported PAT

183.78 550.99

137.94 547.54

128.21 591.09

7.39 507.55

17.84 107.5 9

7.31 124.2 7

0.00 140.9 1

3.13 103.6 3

0.00 161.1 8

NOTE: As the company has not declared their annual result till date, data till last financial year has been taken into consideration. Moreover, latest quarter result has been compared with previous quarter result and same quarter result in last financial year.

Ratios
Particulars EPS (Annualized) CEPS RONW BV sales to eq res to eq expenditue to sales% debt To EQ Int Cover Ratio ROCE ROE Equity Turnover Asset Turnover Current Ratio FY06 43.35 45.72 30.48 142.24 18.68 13.22 67.39 0.00 9.90 52.05 4.34 18.68 0.89 0.91 FY07 48.36 50.78 29.66 163.03 18.99 15.30 65.48 0.00 10.85 49.85 4.84 18.99 0.79 0.89 FY08 54.65 56.58 29.38 186.01 19.99 17.60 64.84 0.00 14.34 47.66 5.46 19.99 0.73 1.99 FY09 59.05 61.02 28.00 210.87 22.52 20.09 64.67 0.00 21.36 44.56 5.91 22.52 0.77 3.12
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OUTLOOK
Glaxo is the third largest pharmaceutical player in the India market with a market share of 5%. The companys product portfolio includes both prescription medicines and vaccines. Glaxo sells prescription medicines across therapeutic areas such as anti-infectives, dermatology, gynaecology, diabetes, oncology, cardiovascular disease and respiratory diseases. Majority proportion of the companys Revenue comes from the acute therapeutic portfolio. However, the company is now scouting for opportunities in high-growth therapeutic areas like CVS, CNS, Diabetes and Oncology. Further, with a strong parentage, Glaxo plans to increase its product portfolio through patented launches and vaccines. With growth in Adjusted PAT at moderate level of 8% and also EPS at high level of 60, it is costly option at current price. Share price are expected to adjust before it will regain again.

REFERENCES:
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http://www.bankofcanada.ca/en/rates/us-interest-look.html
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http://www.census.gov/indicator/www/ustrade.html http://www.morganstanley.com/views/gef/ http://ec.europa.eu/economy_finance/euro/index_en.htm http://www.theodora.com/wfbcurrent/european_union/european_union_economy.ht ml http://ec.europa.eu/budget/index_en.htm http://www.ecb.int/stats/html/index.en.html http://www.nho.no/getfile.php/filer%20og%20vedlegg/BE%20Economic%20Outlook %202010%20Better%20but%20still%20fragile.pdf

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