http://www.equitymaster.com/research-it/sector-info/food/Beverages-Food-Tobacco-Sector-AnalysisReport.

asp#fy

India is the world's second largest producer of food after China. It is the largest producer of milk, second largest producer of fruits and vegetables and the third largest fish producer in the world. Armed with a huge agriculture sector, abundant livestock & cost competitiveness, India is fast emerging as the sourcing hub of processed food. The food processing industry is valued at $ 135 bn and is still nascent as value addition of food products is a mere 8%. Rising disposable incomes & shift in consumption pattern towards ready-to-eat foods are expected to fuel demand for processed foods. The food processing industry is segmented into dairy, fruits & vegetables processing, grain processing, meat & poultry processing, fisheries and consumer foods that include packaged foods and beverages. The industry is characterized by a huge presence of small scale and the unorganized sector forming 70% share by volume and 50% share by value. The dairy sector, which has the highest share of processed foods, is dominated by the unorganized sector. A few corporate players including MNC's such as Nestle and Britannia have forayed into emerging segments such as Ultra Heated Treatment (UHT) and flavoured milk. Even ITC wants to enter the dairy sector in a big way. In fruits and vegetables, juices and pulp concentrate are largely manufactured by the organized sector whereas traditional items such as pickles, sauces and squashes are manufactured by

the unorganized sector. Only 1-2% of the total meat is converted into value-added products mostly by the unorganized sector. However branded products like Venky's and Godrej Real Chicken are gaining popularity. Processing of fish into canned and frozen forms is carried out almost entirely for the export market. In packaged foods, confectionaries, biscuits, bread and chocolates are growing at a brisk pace. Indian snack food is witnessing demand in the overseas market. Cigarettes account for only 15% of the total quantity of tobacco produced in the country whereas in the rest of the world, 90% of the tobacco produced is consumed in the form of cigarettes. The bulk 85% of the domestic tobacco produced is consumed in the form of chewing tobacco (gutka, khaini & zarda) and bidis. The cigarette industry is subject to disproportionate & high taxation. This is evident in the fact that more than 75% of taxes are raised from cigarettes in the tobacco sector. Excise duty makes up over 50% of the cost of a cigarette.

Key Points Supply

Abundant supply through a distribution network of over 8 m stores across the country. Distribution networks are being beefed up to penetrate the rural areas. Tobacco enjoys high penetration even in rural areas as bidis are manufactured by the unorganized sector. Processed food demand is growing at 10%-15% per annum. Rising contribution of women to the working force and growing nuclear families has led to higher demand for convenience foods, especially in urban areas. Tobacco demand is largely inelastic. to Huge investments in promoting brands and setting up distribution networks. Cigarettes, in addition, suffer from punitive taxation policies of government. Suppliers being small and fragmented have limited

Demand

Barriers entry

Bargaining

power suppliers

of bargaining power. Companies like ITC source their agriinputs internally thereby reducing their dependence on suppliers. Most tobacco companies have integrated backwards and have their own supply chains. Therefore, the bargaining power of suppliers is not high.

In packaged foods, the bargaining power of customers is Bargaining power of restricted to the mass or the lower end of the price segment which is price-sensitive. As tobacco consumption is more customers or less a habit, the bargaining power of consumers is only to the extent of choice of the brand. Competition Domestic unorganized players & established MNC's pose competition. The recent inflationary environment has led to increased demand for private label brandsavailable at a discount. In case of tobacco, branded cigarettes, bidis and contraband compete with each other.

TOP Financial Year '12 The food and beverage companies reported a good financial performance in FY12. All the topline companies grew in double-digits backed by price-hikes and healthy volume growth. Nestle, Britannia and ITC each recorded growth of around 20%. However, sales growth of Glaxo Smithkline Consumer Healthcare (GSKCH) moderated to 16.5% after growing at an average of 20% in the past 3 years. Controlled raw material costs enabled a majority of the companies to improve operating margins during the year. Only GSKCH saw its operating profitability shrink by 40 basis points. Earnings of all the companies grew in double-digits; with Britannia clocking the steepest rise of 39% backed by lowered interest and depreciation expenses for the year. TOP Future Prospects: The food industry is expected to grow at a compounded annual growth rate of 10% to reach $ 200 bn by 2015. Demand drivers such as urbanization, increase in the number of nuclear families and working women, higher disposable income and the changing consumption pattern are likely to boost demand for processed foods. The growth will be aided by widening reach of organized retail. The popularity of food and agro products has attracted a number of

foreign companies such as McDonalds, Pizza Hut and Kentucky Fried Chicken. The Confederation of Indian Industry has estimated that the food processing sector has a potential of attracting USD 33 bn of investments in 10 years. Moreover, Indian food brands such as Bikanervala Foods, MTR Foods, ITCs Kitchen of India and Satnam Overseas Basmati Rice are finding place in retail chains of US and Europe. The government has implemented several schemes to promote the growth of the food processing industry. The Centre has permitted Income tax deduction of 100% of profit for five years and 25% of profit for the next five years in case of new agro processing industries to package and preserve fruits and vegetables. The excise duty on meat and fish products has been halved to 8% whereas dairy machinery has been exempted from duty. The Indian government has approved funds for establishing 15 mega food parks across the country. The government aims to enhance the processing level of perishable from 6% to 20% and increase value addition from 20% to 34% by 2015. The country is witnessing a structural rise in taxation on cigarettes. The state government in Uttar Pradesh raised the value-added tax on cigarettes from 17.5% to 50% in July 2012. Other states like Karnataka and Kerala too have raised taxes on cigarettes. After the reclassification of gutka as a foodstuff, 12 states in India have banned its sale, production and distribution. This is likely to adversely impact the industry as state governments try to make up for the revenue loss through higher taxes on cigarettes.