VO L 3

2011

eacon
Sector Special
Beacon this time is a sort of companion piece to the Summers Edition. Weve dubbed this one the Sector Special and the name is indicative of what lies inside. Sector Reports. Pick that which suits your fancy and read on! Any bit of reading on these industries, each one here bearing immediate relevance to SIRP, should hold the first years in good stead during their GDs and PIs. As for MBA II whose rhythms and beats speak of a languorous existence, the writer here does not wish to call upon the imminence of final placements. Nay. This is more of an appeal to the part of us that acknowledges a good body of work. Credit where credit is due, as they say. Happy Reading !

Contents

AUTOMOTIVE

INTRODUCTION:
India's automobile industry, currently estimated to have a turnover of US$ 73 billion, accounts for 6 per cent of its GDP, and is expected to double its turnover to US $ 145 billion by 2016. Currently the 7th largest in the world, the industry has grown significantly over the last ten years during which industry volumes have increased more than three-fold from 4.7 million to 14.9 million. The industry, by virtue of its deep connects with several key segments of the economy, occupies a prominent place in the countrys growth canvas. A robust transportation system plays a key role in a country's rapid economic and industrial development, and the welldeveloped Indian automotive industry justifies this catalytic role by producing a wide variety of vehicles, which include passenger vehicles, commercial vehicles, two wheelers and three wheelers.

HISTORY:
The history of the Indian automobile industry has four distinct phases. Phase 1 The Reign of the Ambassador (Till 1983) This phase of Indian car industry lasted till the early 80s when cars used to be a status symbol and belonged to those segments that were financially well to do. This was the age of the HMs Ambassador and the Premier Padmini. Very few other imported cars were seen on the roads. Low levels of urbanization meant that there was little awareness about the automobiles in the country and owning a car was a costly affair right from the purchase to the car to operation and maintenance. Phase 2 800 (Mid 1980s to Early 1990s) The second phase began with the advent of the hatchback Maruti 800, based on the Suzuki Motors Alto. Sanjay Gandhis efforts towards establishing a company that aimed at developing Indias first affordable car came to fruition in 1983 when production began at the Gurgaon facility. The advent of this small iconic car in India triggered the first wave of sentiment where car buyers across the nation aspired to something that was within their reach. Phase 3 Entry of Foreign Players (Mid 1990s to Early 2000) The next phase was marked by the opening up of the Indian automobile industry for the foreign players with liberalization in 1991. These foreign players like Honda, Hyundai, Toyota, GM and Ford built the foundation upon which the industry as we know it today was built. This was primarily characterized by influx of advanced technology and production techniques along with the best practices they adopted across the world. While the small car segment was dominated, with few exceptions, by Maruti, foreign players

along with Tata Motors and Mahindra & Mahindra tasted success in other segments. Honda City was a game-changer in the premium mid-size sedan segment and has been the car to buy for years now. Toyota brought the reliability it was renowned for across the world into vehicles like Qualis and Corolla. The luxury carmakers like BMW, Mercedes and Porsche found a niche for themselves in the Indian market. In all, the diversity in product offering increased significantly. Among the few failure stories of this period include the shutdown and exit of Daewoo Motors from the passenger cars segment. Phase 4 Rise of the middle class, Rise of consumerism and Fast paced growth (Mid 2000 to Modern Automobile Industry) In this phase, carmakers took advantage of the burgeoning middle class and the changing pattern of consumerism in India. Indians saw an upsurge in their income and spending. Increasing urbanization and purchasing power of the middle class provided the companies with the space to flourish. The Indian auto industry has doubled in the last five years.

TRENDS:
Booming Small Cars Segment The compact segment has grown into leaps and bounds during the last 6-8 years and currently boasts of a wide range of cars (Alto, Swift, i10, Santro, WagonR, Zen, Spark, Indica etc). The Indian car industry is still dominated by the small car segment with contribution of over 65% to overall sales. Modern small cars are equipped with advanced technology and safety features. The segment has evolved into the premium hatch back segment which is dominated by the i20, Swift, Fabia, Ritz and Figo. TATAs Indica has made its place in the people mover segment. Other notable small cars that have made their entry are Micra and Polo. The segment is still growing and many new models are in the pipeline. Toyota has already launched its Liva and Honda will make an entry to this segment with Brio. New Development in Form of Mid Size Cars Segment The mid size segment has also seen a flurry of new models in India and has registered consistent growth. Honda City, Ford Ikon, Hyundai Accent and Maruti Esteem have been the front runners in lower end of this segment. The luxury sedan segment is dotted with models such as Accord, Civic, Laura, Corolla Altis and Camry. Growing Utility Vehicle Market Scorpio, Bolero, Safari, Innova, Fortuner, Pajero, Endeavour, Land Rover and Outlander including others have made significant mark in MUV and SUV segment making it the fastest growing segment. However, this segment is still limited to around 5% of the market in India.

Alternate Fuels, Hybrid Cars and Electric Cars Thanks to skyrocketing fuel prices, global warming and changing technologies, that triggered the need of alternate fuels, hybrid cars and electric cars. Barring the unsuccessful stint by Honda Civic Hybrid, the market has not seen any initiative for hybrid technologies in India. Though the Toyota Hybrid option is available as an import, it is quite costly due to government trade policies. There is lot of scope in development of electric car segment in India which is currently limited to the Reva, the only electric vehicle available in India. The Government needs to take measures to promote this segment given that the concern of rising fuel prices is ever present. GM is planning to make an entry in electric car segment with the upcoming electric Chevrolet Beat which may change the market dynamics largely. Increasing Demand for Diesel Cars Gone are the days when diesel cars used to be noisy, vibrating and a maintenance worry. Technology has a come a long way in making diesel vehicles more refined and easy to maintain. Currently diesel cars contribute to 30% of total sales, which is expected to be around 45 to 50% in next decade time. Today, Fiats multi-jet engine (1.3 Litre) powers Maruti, TATA and Fiat cars and several other CRD engines available in the market. The growing demand for diesel cars has forced Honda to consider bringing diesel cars in India. Other successful models have been the Ford Fiesta, Hyundai Verna and Maruti Swift Dzire to name a few. Micro Cars TATA has been the front runner in starting the era of micro cars with its ambitious Nano, which debuted in the Indian market in 2010 after a chequered development effort. It added a new term in automobile dictionary, The Nanolution, a new segment altogether. Several others are set to follow including Hyundai's mini car (to be launched in late 2011), Maruti's Servo and Bajaj's small car very shortly. The development of ultra-small cars is aimed at the Bottom of Pyramid and has the potential to change the shape of automobile industry in India. Changing Approach towards Customer Service Increasing number of cars in the market has evolved the requirement of improved in customer service standards. Customers are becoming cautious about the total ownership cost (including maintenance, insurance, finance options, etc.) of the vehicle. Carmakers today offer value added services, maintenance package, emergency assistance and extended warranties on the vehicle to lure customers who want a hassle free ownership and good resale value for the car. New Technologies Today, car manufacturers offer a complete range of advanced features in car and also offer

automatic transmission option. Cruise control, air bags, anti-locked braking system (ABS), parking sensors, blue tooth connectivity, steering mounted controls, climate control, navigation system, etc. have become regular features now days leaving behind the era when technology was limited to power steering and power windows. Used Car Market One of the major characteristics of the modern automobile industry in India is the evolution of the used car market which is all set to surpass the new car market in couple of years. Car companies have set up a separate division of used car sales to fulfil the used car demands, which also help in assisting customer get good resale value of their cars. (Example - Maurti's True Value, Hyundai's Advantage, Mahindra's First Choice, TATA Motor's Assured, etc.) The above is a short summary of how the Indian car industry has come a long way from exploring the Top of the Pyramid to hitting the Bottom of the Pyramid. The outlook remains strong in next couple of decades seeing the low penetration of cars in India (10 cars per 1000 people) and the consumption boom. Several changes can be witnessed along with the handling challenges of increasing lending rates, infrastructure limitations and rapidly swinging consumer behaviour.

CURRENT STATUS:
Macro and Micro Economic Status: RBI raised its key policy rates 50 basis points on 26th July. This has been 11th increase in 15 months and the repo rate now stands at 8%. The 50 bps hike in the interest rates announced by RBI could hit passenger vehicle sales very hard. The growth rate of the PV sales has already dropped from about 33% last year to about 9% during the last quarter. Although some moderation in the growth rates was expected, the moderation has been far more than forecasted, to a large part due to the successive increases in the interest rates that have made it more expensive for the customers to purchase vehicles. High interest rates lead to postponement of vehicle purchase which will have a negative impact on the short to medium term sales. SIAM has already scaled down it passenger vehicle sales forecast for this year from 16-18% to10-12%. But rising cost of finance is definitely not the only reason for revision of forecasts. Inflation figures for July 2011 are estimated to be 9.22%. Though it is less as compared to June 2011 figures of 9.44% and also the lowest in past six months, it is still substantial. Also revisions of figures or May 2011 have given us 9.56% inflation as compared to earlier

estimated figure of 9.06%. This would be worrisome as 9.44% figure estimated for June 2011 might be quite close to a double digit on rivision. Further inflation in the manufacturing sector stood at 7.49% in July year on year as compared to 7.43% in June. These are combined ingredients for another rate hike in Mid-September 2011, which will further affect auto sales. Since UPA returned to power in May 2009, petrol prices have gone up by over 50%. In the last one year alone the increase is of the order of 30%. With rise in raw material prices on production side and rise in fuel prices and lack of finance due to credit crunch policy adopted by government, on sales side, Automobile sector seems to be in a fix in the short term at least.

MAJOR SEGMENTS

The Indian two-wheeler (2W) industry reported a strong double-digit volume growth of 17%in Q1, 2011-12 (YoY), even as several other automobile segments showed signs of a cyclical dip in growth during this period. While the northward movement in macro-economic variables including inflation, fuel prices and interest rates has been the nemesis of the automobile industry at large, the 2W industry has been relatively less impacted so far. ICRA believes that the resilience shown by the 2W industry volumes is likely to persist, a large base notwithstanding, with the industry looking on course to record yet another year of double-

digit growth. However, the situation may change in the event of higher than expected decline in Indias GDP growth or persistent inflationary pressures over a longer period.

INDUSTRY DRIVERS AND CHALLENGES

Steady economic growth and favourable demographic profile Barring marginal blips during the last couple of years, the Indian economy has moved into higher growth (8.5%+) trajectory which is likely to be sustained over the medium term. In addition to steady economic growth, the automobile industry is also benefitting from Indias favourable demographic profile, which is reflected by its very young population (50% of population under the age of 25), steadily improving dependency ratio, growing urbanization and trend towards smaller, nuclear families. These trends in turn results in higher savings and increased ability to purchase vehicles, as well as explaining the preference for smaller-cars. In addition to favourable demographic profile, rising per capita GDP levels is also resulting in improvement in vehicle affordability in India, which is estimated to amongst the lowest when compared to other major automotive market. In India, the per capita GDP has almost doubled to US$ 3,270 between 2000 and 2009, while car prices (adjusting for the decline in duties) have remained almost at the same level as they were five years back, thereby increasing flexibility to own cars. Favourable demand scenario from smaller towns and rural areas In addition to demand from urban areas, smaller towns and rural India have been incrementally driving demand for vehicles in India. For instance, the share of sales from top-10 cities has fallen to 40-45% from 60%-65% over the last five-to-six years. Maruti Suzuki, also for instance now generates nearly 19% of its sales from non-urban areas compared to just 4-5% about five years back. This has largely been prompted by rising disposable income levels in smaller towns and rural areas, improving road connectivity and higher number of earning members in the family. Industry estimates suggest that approximately 60% of the rural economy now depends on non-agricultural income such as trading, remittances from cities, employment in manufacturing sector etc. That apart, substantial increase in crop prices, which has been moving up over the past three years, has also resulted in higher disposable income. Additionally, the increase in land prices across the country, and the implementation of the sixth pay commission has collectively helped in supporting the growth in the rural and semiurban cities/tier III cities. The OEMs have also helped expand demand by targeting these markets with greater financing availability and better service & distribution reach.

CHALLENGES
Rising interest rates and Fuel Prices After reporting strong growth over the past two fiscals, the domestic passenger vehicle industry has started witnessing slowdown with Q1 FY12 reporting a relatively modest 8.7% growth on YoY basis. Within the industry, the cars segment grew by 7.2%, while UVs and Multi -Purpose Vehicles (MPVs) reported a growth of 5.1% and 29.2%, respectively. Successive rise in interest rates on back of RBIs monetary tightening stance coupled with rise in fuel prices are key factors affecting consumer sentiment, leading deferment of purchases. While April and May were relatively better months, partly helped by increase in inventory position at the dealer level; June and July sales have been significantly weaker given the destocking done by dealers. Among segments, the small car segment, which account for over 80% of the volumes have been impacted the most, while mid-size segment owing to new product launches has been somewhat insulated from the slowdown so far. The premium & luxury end segment of both cars and UVs also continue to post steady growth due to low-base effect and by virtue of being relatively inelastic to rise in ownership cost. Rising interest rates coupled with rising inflation and increasing petrol prices are major challenges that the sector faces.

INDUSTY CAPACITY:
In India, automotive is one of the largest industries showing impressive growth over the years and has been significantly making increasing contribution to overall industrial development in the country. Presently, India is the world's second largest manufacturer of two wheelers, fifth largest manufacturer of commercial vehicles as well as largest manufacturer of tractors. It is the fourth largest passenger car market in Asia as well as a home to the largest motor cycle manufacturer. The installed capacity of the automobile sector has been 9,540,000 vehicles, comprising 1,590,000 four wheelers (including passenger cars) and 7,950,000 two and three wheelers. The sector has shown great advances in terms of development, spread, absorption of newer technologies and flexibility in the wake of changing business scenario. Major Players, market share and competitive analysis The competitive pressures in the Indian vehicle industry continue to intensify given the momentum with which new entrants are increasing their presence in the domestic market.

The strong growth prospects and growing size has attracted most manufacturers in the Indian markets and with favourable response to multiple launches, the market share of new players continues to rise. According to ICRA reports incumbents will continue to derive competitive advantage on back of their strengths in low-cost manufacturing (especially in the small car segment), established vendor base strong brand identity and wide-spread distribution & servicing reach, such an advantage is likely to diminish in the long-run as new players with global experience gain brand recognition and expand their product offerings and network. Presence in the small car segment (with superior product offerings), a spread out dealership and servicing network and competitive pricing on back of locally sourced auto components are going to be key factors in determining market share gains Passenger Vehicles: Maruti is clearly a market leader in small and mid-car segment. However, its market share has fallen below 50% in small car segment for the first time. The credit for this goes to a slew of cars that stormed the market at highly competitive prices from the worlds cheapest car Tata Nano to GM beat and Hyndai i20. As can be seen from the table below, Nissan Micra, Volkswagen Polo, Ford Figo and Tata Motors have eaten into the share of Maruti. Being the oldest in the sector, Maruti still has an edge over other players, owing to its well established manufacturing facilities and distribution network. Trend in Market share in Small Car segment

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Trend In Market share in Mid-size car segment

Trend in market share in Executive car segment

Trend in market share in Premium and luxury car segment

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Trend in Market share in UV segment

Two Wheeler segment: There are no drastic changes in the market share of two-wheelers since Quarter 1 2010. However, market share of Hero Motocorp has been on a rise as opposite to that of Honda Motorcycles which is on a decline fractionally.

Commercial Vehicles: Market share in commercial vehicle segment too does not signify any game changing events except that of Force Motors whose share fluctuated between 16.3% to 27% from Q1 2010 to date in LCV Passenger car segment.

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Trend in market share in domestic M&HCV-Goods segment

Trend in market share in domestic M&HCV-Passenger segment

Trend in market share in domestic LCV- Goods segment

Trend in market share in domestic LCV-Passenger segment

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FINANCIAL ANALYSIS:

WHAT LIES AHEAD?

The medium to long term outlook for the domestic CV industry remains robust, given the expectations of strong economic activity and infrastructure development, besides the intersegmental shift. However, the sharp growth in volumes that was witnessed during the last 6-7 quarters may moderate to an extent in the short term. The contributing factors include, among others; expected increase in interest rates; increase in vehicle prices following the successive price revisions (upward) made by the manufacturers following the rise in input material costs; and the absence of the pre-buying that happened ahead of implementation of BS III norms. While the long-term growth prospects for the domestic automobile industry remain favourable, pricing flexibility for the makers is likely to remain constrained mainly because of the entry of new players in the industry and the capacity additions taking place. Besides, the industry would also have to cope with the cost pressures arising from the tightening of regulatory norms on safety and emission. Over the medium term, the growth is likely to be higher in the upper end of the M&HCV segment (that is 16T and above) and in the lower band of the LCV segment (that is less than 3.5T segment). As per ICRA reports the domestic M&HCV segment is expected to grow in the range of 9.5%-11.5% over the next five years and the LCV segment to grow in the range of 1013% with growth in the (less than 3.5T) estimated to be higher at 13- 15% during the same period.

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According to ICRA reports the entry segment volumes in the domestic market is epected to grow at a much slower pace than the overall 2W industry and volume growth in this segment to be driven mainly by exports. This is because the segment is no longer a key focus area of manufacturers due to limited scope for margin expansion and high interest-rate sensitivity. While the executive segment is expected to maintain its steady growth, competition is likely to intensify following aggressive model refurbishment and new model launch plans. The premium segment is expected to remain the fastest growing over the medium term, given the strong growth in purchasing power in the hands of middle-class urbanites, especially in the age group of 20-30 years. This should also translate into superior profit margins for players that are stronger in the premium segment. The passenger vehicle market size in India is now comparable to some of the developed economies of the world and ranks seventh globally. The presence of global players, introduction of global platforms/technologies and stricter emission norms indicate that the market is gradually attaining maturity. A buoyant economic growth, growing middle class population, rising disposable income levels, relatively low penetration of cars and adequate availability of financing are likely to provide an ideal backdrop for a sustained long term demand growth for the sector. However, with increasing interest from foreign players, competitive intensity is likely to become a key challenge with most major markets facing excess capacity and demand saturation, the Indian market is likely to remain a key destination for global majors over the medium term. With most of the international players eyeing the small car market, the competitive intensity is expected to increase in this segment resulting in greater fragmentation of market share, especially over the long-term. The Indian passenger vehicle industry is expected to reach 4.86 million in annual sales by FY16, representing a growth of 10.8% CAGR. With global demand shifting to smaller cars, global players are likely focus on strategies of producing cars of the same platforms in low-cost countries like India, Thailand and Mexico. In terms of cost competitiveness, India has built up the scale and significant competencies and cost advantages in the production of small cars. It benefits from lower development and labour costs, and improving auto component manufacturing base. Maruti Suzuki and Hyundai have already established meaningful presence in exports out of India, and now many other global players including Renault-Nissan, VW, Ford have either adopted strategy or are in the process of exploring opportunities to develop India as part of their global manufacturing hub. Interestingly, China despite being known for its low-cost

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manufacturing capabilities and large automotive market supported by presence of international players is yet to establish a meaningful presence in exporting cars, though the situation may change over the medium term, especially considering rising capabilities and aspirations of its large local players. With most of the global players targeting the most competitive, small car segment, increasing localization remains critical for OEMs to establish profitable business given the competitive intensity in the small car segment. As a result, most OEMs are focused on increasing localization content to reduce costs and thereby compete with market leaders. Additionally, auto ancillaries will have to ramp-up their capital investment as OEMs continue to develop new platforms and increase their localization contents. Besides localisation of components, key challenges facing new entrants would be establishing a strong service/ distribution network, which has become increasingly prohibitive due to rising real estate costs in many markets. Going forward sharing and co-operation on distribution network and service facilities could play a significant role in rationalising cost structures. In terms of product launch, while most global majors are likely to choose from their existing portfolio for launch in India, key to success would be the ability to incorporate changes necessary to meet Indian preferences and market conditions.

RECOMMENDED READING:
Websites : siamindia.com , acmainfo.com, Research reports: ICRA, Ernst & Young Auto Track, CRISIL.

COMPANY PROFILES
Hero MotoCorp: Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's largest manufacturer of two - wheelers, based in India. In 2001, the company achieved the coveted position of being the largest two-wheeler manufacturing company in India and also, the 'World No.1' twowheeler company in terms of unit volume sales in a calendar year. Hero MotoCorp Ltd. continues to maintain this position till date.

Operating Profit Margins (OPM): Hero MotoCorps OPM declined to 14.4% in Q1, 201112, lower by 37 basis points (bps) QoQ in the wake of commodity price escalation which could not be fully neutralized through price increases; even as the margins during the quarter were

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150 bps higher on a YoY basis. However, excluding the companys estimated royalty payments to HMC till Q3, 2010-11, HHMLs OPM in Q1, 2011-12 was 228 bps lower even on a YoY basis. This highlights the adverse impact of commodity price movement on the companys profit margins over the last several quarters, mirroring the declining margin trend for the automobile industry in general. Net Profits: Hero MotoCorps Q1, 2011-12 PAT at Rs. 557.9 Crore grew by 11.2% QoQ and 13.5% YoY. Still, the companys PAT was lower than the highs achieved in 2009-10 particularly due to the benign raw material price scenario prevailing during that period. Products: Achiever, CBZ Extreme, CD Dawn, CD Deluxe, Glamour, Hunk, Karizma, Passion, Pleasure, Splendour Bajaj Auto: The Bajaj Group is amongst the top 10 business houses in India. Its footprint stretches over a wide range of industries, spanning automobiles (two-wheelers and three-wheelers), home appliances, lighting, iron and steel, insurance, travel and finance. The group's flagship company, Bajaj Auto, is ranked as the world's fourth largest two- and three- wheeler manufacturer and the Bajaj brand is well-known across several countries in Latin America, Africa, Middle East, South and South East Asia. Founded in 1926, at the height of India's movement for independence from the British, the group has an illustrious history. The integrity, dedication, resourcefulness and determination to succeed which are characteristic of the group today, are often traced back to its birth during those days of relentless devotion to a common cause. Jamnalal Bajaj, founder of the group, was a close confidant and disciple of Mahatma Gandhi. In fact, Gandhiji had adopted him as his son. This close relationship and his deep involvement in the independence movement did not leave Jamnalal Bajaj with much time to spend on his newly launched business venture. His son, Kamalnayan Bajaj, then 27, took over the reins of business in 1942. He too was close to Gandhiji and it was only after Independence in 1947, that he was able to give his full attention to the business. Kamalnayan Bajaj not only consolidated the group, but also diversified into various manufacturing activities. The present Chairman of the group, Rahul Bajaj, took charge of the business in 1965. Under his leadership, the turnover of the Bajaj Auto the flagship company has gone up from INR.72 million to INR. 120 billion, its product portfolio has expanded and the brand has found a global market. He is one of Indias most distinguished

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business leaders and internationally respected for his business acumen and entrepreneurial spirit.

Operating Profit Margins (OPM): Although there was a marked increase in Bajaj Autos
Raw Material Expenses as a proportion of Revenues during Q1, 2011-12, the decline in the companys OPM was not as sharp. The companys OPM declined to 19.1% in Q1, 2011-12, lower by 73 bps QoQ and 9 bps YoY contributed by commodity price escalation. However, Bajaj Autos higher sales volumes, focus on higher-end motorcycles and greater proportion of 3W sales (which are more profitable relative to 2W) allowed it to largely neutralize the input cost headwinds. While the company managements outlook on exports remains robust with its focus on African and South-East Asian markets, the companys ability to sustain its margins would hinge on its pricing strategy post discontinuation of DEPB benefits after September 2011. Net Profits: The healthy OPBITDA growth recorded by Bajaj Auto in Q1, 2011-12 also translated into a strong PAT growth which increased to Rs. 711.1 Crore, reflecting a growth of 20.5% YoY Products: Two Wheelers: Avenger 220 DTS-I, Pulsar 135 LS, Pulsar 220 DTS-I, Pulsar 180 DTS-I, Pulsar 150 DTS-I, Discover 150, Discover 125, Discover 100, Platina 125, Platina 100 cc, Ninja 250R, Ninja 650R Commercial Vehicles: GC Max Diesel, GC Max CNG, RE600, RE 2S, RE4S, Mega Max

Maruti Suzuki: Maruti Suzuki is India and Nepal's number one leading automobile manufacturer and the market leader in the car segment, both in terms of volume of vehicles sold and revenue earned. Until recently, 18.28% of the company was owned by the Indian government, and 54.2% by Suzuki of Japan. The BJP-led government held an initial public offering of 25% of the company in June 2003. As of 10 May 2007, Govt. of India sold its complete share to Indian financial institutions. With this, Govt. of India no longer has stake in Maruti Udyog.

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Maruti Udyog Limited (MUL) was established in February 1981, though the actual production commenced in 1983 with the Maruti 800, based on the Suzuki Alto kei car which at the time was the only modern car available in India, its only competitors- the Hindustan Ambassador and Premier Padmini were both around 25 years out of date at that point. Through 2004, Maruti Suzuki has produced over 5 Million vehicles. Maruti Suzukis are sold in India and various several other countries, depending upon export orders. Models similar to Maruti Suzukis (but not manufactured by Maruti Udyog) are sold by Suzuki Motor Corporation and manufactured in Pakistan and other South Asian countries Operating results and profits: MSILs operating income grew by 2.6% on YoY basis in Q1FY12 driven 4.0% improvement in realisations even as volumes declined by 0.6% during the quarter. Driven by weakening underlying demand and shutdown at Manesar, the companys domestic volumes grew marginally by 3.2% during the quarter, while export sales declined on back of slowdown in demand from European markets Despite rising input material prices, the company maintained its OPBDIT margins at 9.5% on YoY basis driven by cost containment measures; improvement in realizations (price hike & impact of higher diesel car sales), lower royalty outgo and selling & distribution spend. The companys net profit grew by 18.0% to Rs. 549 crore on back of higher non-operating income. Products: Maruti 800, Alto, Omni, Gypsy, Estilo, WagonR, Eeco, A-star, Ritz, Swift, SX4, Dzire, Grand Vitara Mahindra and Mahindra In 1947, Mahindras introduced India to the utility vehicle. More than 65 years later, they are still India's premier utility vehicle (UV) company, at the same time they have also grown quite a bit. In addition to making groundbreaking UVs like the Scorpio and Bolero, Mahindra offers cars, pickups, and commercial vehicles that are rugged, reliable, environmentally friendly, and fuel-efficient. Their global presence means you can find Mahindra vehicles on the roadsboth paved and unpavedof Australia, Europe, Latin America, Malaysia, and South Africa. Operating results and profits: Net income of the Company grew by 26.60% to Rs. 23,803 crores in the year under review from Rs.18,801 crores in the previous year. Consequent to this remarkable performance, the

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Profit for the year before Depreciation, Interest, Exceptional items and Taxation recorded an increase of 19.37% at Rs. 3,766 crores as against Rs. 3,155 crores in the previous year. Similarly, Profit after tax clocked an increase of 27.51% at Rs. 2,662 crores as against Rs. 2,088 crores in the previous year. Products: Passenger Vehicles: Bolero, REVA Electric Cars, Scorpio, Thar, Verito, Xylo, Actyon, Actyon Sports, Chairman W, Korando, Kyron Rexton II, Rodius Commercial Vehicles:, Alfa, Gio, Mahindra Navistar Trucks, Bolero Maxi Truck, Genio, Loadking, Maxximo, Tourister Buses Tata Motors: Established in 1945, Tata Motors' presence indeed cuts across the length and breadth of India. Over 5.9 million Tata vehicles ply on Indian roads. The Company's manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand), Sanand (Gujarat) and Dharwad (Karnataka). Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and Fiat powertrains. The Company's dealership, sales, services and spare parts network comprises over 3500 touch points; Tata Motors also distributes and markets Fiat branded cars in India. OPERATING RESULTS AND PROFITS: The Company recorded a turnover of Rs.52,136 crores, a growth of 35.9% over the previous year. While the Company maintained a strong focus on cost control and market pricing, the increase in raw -material cost and fixed marketing expenses resulted in a lower EBITDA margin of 9.9% as compared to 11.7% in the previous year. The Profit Before Tax and Profit After Tax for 2010-11 was Rs.2,197 crores and Rs.1,812 crores respectively, as compared to Rs.2,830 crores and Rs.2,240 crores in the previous year. It may be noted that the previous year Profit included a net positive impact of Rs.958 crores, mainly on account of Profit on certain divestments which was partly set off by a loss on redemption of preference shares in a subsidiary company.

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Jaguar Land Rover results for 2010-11 showed a significant improvement with increase, both in volumes and revenue, better product mix, favourable exchange rates and higher margins. The introduction of the new Jaguar XJ, growing momentum of the Range Rover and Range Rover Sport and, in particular, the strengthening of the Jaguar Land Rover business in China, where it opened a National Sales Company (NSC) in mid 2010, were the main drivers. In addition, Jaguar Land Rover continued to benefit from cost efficiencies and effective cash Management initiatives adopted in response to the challenging operating conditions in 2008 and 2009. As the global markets recovered coupled with a strong focus on product and market initiatives, particularly at Jaguar and Land Rover, the Tata Motors Group turnover in 2010-11 grew by 33.1% to Rs.1,23,133 crores. Tata Motors Group recorded its highest ever Consolidated Profit Before Tax of Rs.10,437 crores (Rs.3,523 crores in 2009-10) and the Consolidated Profit for the Year of Rs.9,274 crores (Rs.2,571 crores in 2009-10). Products: Nano, Indica, Vista, Manza, Indigo, Xenon XT, Aria, Sumo, Safari, Grande, Venture, Land Rover Freelander, Land Rover Discovery, Range Rover, Jaguar XJ, , Jaguar XF, Jaguar XK

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BANKING SECTOR
INTRODUCTION
Banking in general terms is the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit. A strong banking sector is a must for any economy to flourish be it developing or developed.

Origin and Evolution

In India, an informal system of banking has prevailed since ancient times wherein wealthy businessmen would act as depositories and lenders to the general public. The remittance of money through Hundies, an indigenous credit instrument, was very popular. The Hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different parts of the country. However, organised commercial banking as we know it today originated in the last decades of the 18th century after the establishment of the Rule of East India Company. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790. Later on the East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called them Presidency Banks. During the second half of the 19th century the presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. Of the total deposits of Rs 3146 lakh in 1900, the share of these types of banks were respectively 40.94%, 33.38% and 25.68%. The slow growth rate of the banking business till the beginning of the present century was due to a) a high rate of failure of banks, because most of them had been created in speculative rush; b) stagnant economic conditions during this period; c) a decline in prices; and d) the passing of the Currency Act1861, which took away the power of banks to issue notes. During the first half of the 20th century, the banking system progressed rapidly. The deposits increased from Rs 82 crore in 1910 to Rs 957 crore in 1948. Except during the depression of the 1930s, the rate of economic progress was quite high in this period. The world wars contributed to raising the level of economic activity and monetary resources in the economy. In 1921 the three presidency banks were amalgamated to form the Imperial Bank of India (IBI). Although the IBI functioned as quasi-central bank, India did not have an official central bank till 1935 when the Reserve Bank of India was established as the central bank of the country. The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of the Country. Still banking activity continued in India in a largely unregulated manner. The banks were mostly joint stock and concentrated on providing financial assistance to certain factions or ethnic

22

groups. The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The Reserve Bank of India was nationalised on January 1, 1949 through the RBI Act 1948 which empowered it to regulate, control, and inspect the banks in India" and no new bank or branch could be opened without a license from the RBI. Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. The Government of India issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969 each bank with deposits of 50 crore or more. Later the Government Nationalized six more commercial private sector banks with deposit liability of not less than Rs. 200 crores on 15th April 1980. With nationalization the Government of India controlled around 91% of the banking business of India.

Post Nationalisation
The performance of the banking sector since nationalisation has been impressive, however by 1990 it was realised that this performance was nowhere near sufficient enough to meet the needs of the economy. Development oriented policy of the RBI for the nationalised banks completely eroded their profitability. Some recommendations were made by the Chakravarty Committee in 1985 to address this issue however, the government lacking initiative did not carry out these measures. The Narsimham Committee Report 1991 argued that the directed investment and directed credit programmes together with mounting expenditures were responsible for the fact that Non Performing Loans as a percentage of total advances as well as total assets were very high and many banks had lost their financial viability by the end of 1980s. The major reforms suggested by the Narsimham Committee 1991 included a) discouraging use of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) as economic policy enforcement measures; b) reducing priority sector lending mandate to 10% of aggregate bank credit; c) freeing interest rates and allowing market forces to determine them; and d) allowing

23

banks greater autonomy and making them realise that the environment was becoming challenging and they needed to redefine their position within the financial industry. To improve their risk absorption capacity Indian banks were directed to follow the Capital Adequacy Norms suggested by the Basel committee in 1992. Another spate of reforms was proposed by the Committee on the Banking Sector Reforms in 1998 which emphasised the need for a stronger banking system especially in the context of capital account convertibility which would involve large capital inflows and outflows. It also advised raising of the prescribed capital adequacy ratio limit to manage risk better and setting up of an Asset Reconstruction Fund to bad debts of banks.

OVERVIEW OF INDIAS BANKING SECTOR

Banking and financial system of a country plays an important role in promoting the long term growth of the economy. A weak banking sector not only jeopardizes the long-term sustainability of an economy, it can also be a trigger for a financial crisis which can lead to economic crises. An underdeveloped or ill functioning banking system can not only distress the credit portfolio of the country and cause a general slowdown of the economic activities but can also spill-over and have a contagion effect on other countries in the region or the whole world considering the current level of global integration.

Macro and Micro Environment

Global financial markets witnessed turbulent conditions during the most part of 2007-08 as losses on US sub-prime mortgage loans escalated into widespread financial stress, raising fears about stability of banks and other financial institutions. According to estimates of the CIA world factbook, real GDP growth has decelerated from 5.2 per cent in 2007 to 3.1 per cent in 2008 and further to -0.7 per cent in 2009. In the face of slowing down of the global economy in 2007-08, India and China remained the main drivers of global growth backed by strong productivity gains and progressive integration into the global economy. The Indian financial sector remained resilient and functioning, despite some volatility. There was no material stress on the balance sheets of banks and nonbanking financial companies on account of toxic financial instruments. There were no solvency issues with any of the financial institutions requiring direct financial support from the Government. Banking as an industry is also affected by global investor sentiment, which has taken a beating in most of the major markets of the world. Credit risk is the new buzz word of economies world-wide. Concerns about sovereign credit risk have also intensified in the light

24

of the fiscal woes of Greece and some other Euro zone nations. Advanced economies are facing challenges in tackling high public debt which may not be addressed with just unwinding of existing stimulus measures. Spill-over effects of these concerns have already manifested themselves in increased sovereign credit spreads with knock-on effects on other asset classes. Shortening of the maturity profiles of bank liabilities during the crisis has created large refinancing needs during the coming few years. International banks will need to take advantage of every opportunity to lengthen the maturity profile of their liabilities and to diversify their liability structure to include more customer deposits.

Evolving Institutional Framework for Financial Stability

Preserving financial stability over the long term requires implementing carefully designed framework that is effective and gains public support over time. In India The Securities and Insurance

The Indian banking sector is adequately capitalised, the Laws (Amendment and Validation) Bill was passed in August 2010, enabling the dominant component being loss absorbing common equity. In Government to constitute an apex Fifact, the migration to Basel II (Standardised Approach for credit nancial Stability and Development Council (FSDC) headed by the Finance and market risk and Basic Indicator Approach for operational Minister for the purpose of nstitutionalrisk) resulted in an increase in the capital adequacy ratio of the izing the mechanism for maintaining financial stability and resolving interbanking system, on similar lines good things can be expected of regulatory disputes. A sub- committee BASEL III. Credit quality continues to remain robust. The share of the Council with the mandate to look after financial stability and interof low cost current and savings account deposits in total regulatory coordination would be deposits is high. Banks are required to hold a minimum headed by the Reserve Bank Governor. The subcommittee would be the first percentage of their liabilities in risk free government securities. stop for resolving any disagreement This, to a large extent, takes care of liquidity and solvency among regulators. issues. Source- RBI report on trends in At the micro level the Reserve Bank of India as the apex financial institution is the biggest influencer of banking operations. The high CPI of 12.4 for the year 2008-09 was anything but an anomaly and has lead to a dedicated tight money policy on RBIs behalf. Since 21st April 2010 the repo and the reverse repo rates have been hiked 11 times each time crushing the supply of liquidity with the banks. The banks have been forced to raise deposit rates to get their hands on more funds. Especially with the governments current resolve to control inflation there doesnt seem to be any relief for banks in the near future.
global banking.

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MAJOR SUB-SEGMENTS
If recent statistics on consumer finance are any indication, the last few years have been trend setting. The traditional debt-averse, middle-class Indians who lived within their thrifty means, never to venture beyond their means, seem to have given way to a new middle-class that is free from all inhibitions regarding conspicuous consumption. Major product segments of retail credit include housing finance, auto finance, personal loans, consumer durable loan and credit cards to name a few. Total banking credit stood at close to Rs. 39 trillion as on March 25, 2011 and reported a strong 21.4% growth in 2010-11, led by credit to the infrastructure sector and to NBFCs. In 2011-12, although the pace of credit growth has been subdued in the first two months (up just 0.2% from March 2011 levels), it is in line with the pattern noticed in the previous years (0.1% in 2010-11 and 0.4% in 2009-10). The credit portfolio composition of Indian scheduled commercial banks is given below. During 2010-11, the infrastructure sector, particularly power, and NBFCs were the key drivers of the credit growth achieved by the banking sector. Credit to the power sector reported a growth of 43%, while other infrastructure credit grew by 34% during 2010-11, against an overall credit growth of 21%. As in March 2011, the infrastructure sector (including power) accounted for 14% of the total credit portfolio of banks. Within the power sector, historically banks have been taking exposure to State power utilities as well as independent power producers (IPPs). Going forward, with many banks approaching the exposure cap on lending to the power sector and given the concerns hovering over the prospects of the sector itself, the pace of growth of credit to this segment could slow down. However, in the short to medium term, the undisbursed sanctions to power projects are likely to provide for a moderate growth. As for bank credit to NBFCs, the same increased by 55% in 2010-11 and accounted for around 5% of the banks total credit portfolio as in March 2011. Moreover, around half of this went to infrastructure related entities, and the rest mainly to NBFCs engaged in retail financing. Most of the NBFCs are focused on secured assets classes, have reported low NPA percentages, and are well-capitalised.

Housing loan sub-segment

Banks are increasing their dominance in housing finance and capturing the market share of the housing finance companies. During 2004-05, the market share of banks stood at 62%, against the 33% by Housing finance companies; Rs2-5 lakh margins constitutes almost a third of the

26

loan size. All the players in this market are adopting an aggressive attitude and the housing loan availability is playing into the players hands. Despite this phenomenal growth in India, the housing loan as a percentage of GDP at 4.91% indicates low penetration when compared to other countries like Malaysia (17%) and Thailand (9%). But again this coupled with the population growth indicates good future prospects.

Car loan sub-segment

Following the housing loans, it is the auto loan which is also giving the growth of retail credit the necessary boost. In Asia Pacific, India has emerged as the third largest market for cars and MUVs i.e. only after Japan and China. Low interest rates, easy finance, up-gradation of rider from two- wheeler to 4-wheeler and opening up of second hand car finance are growth drivers of this segment.

Consumer Durable loan sub-segment

The consumer durable loan follows the auto loan market in the third position. Metro centres continue to dominate the market with 29% of total retail credit, closely followed by the rural market at 27% of total retail market. Urban and Semi Urban centres contribute around 22% each. The rural market uprising is a recent phenomenon, which has immense growth potential. While private sector banks have dominance in metropolitan areas, nationalized banks have their hold in the urban and semi-urban areas. The rural areas are dominated by RRBs.

Education loan sub-segment

The last few years have witnessed a high increase in students aspiring for management and professional courses, leading to a spurt in educational loans. Banks are now having a direct tieup with the educational institutions to cash in on the opportunity. Public sector banks (PSBs) are more focused on the educational loans segment.

TRENDS AND RECENT PERFORMANCE

Historically, the banking sectors credit portfolio has been growing at over 20% per annum over the last several years (except in 2009-10, when the growth rate moderated to 17% mainly because of the decline in ICICI Banks credit portfolio). Over the years, credit growth has outpaced deposits growth; the credit portfolio reported a CAGR of 24% over the last eight years, while deposits achieved a CAGR of 19% and the investment portfolio of 14% over the same period. The higher growth in credit could be achieved because of the slower growth in investments and the increase in capital. In 2010-11, while deposits growth for SCBs slowed down to 17%, credit growth was maintained at 21% with the growth in investments being just

27

13%. The higher credit growth versus deposits growth led to an increase in the credit deposits ratio (CD ratio) from 72.2% as in March 2010 to 75.7% as in March 2011, although the CD ratio moderated to 74.2% as on May 27, 2011, largely because of the slow credit growth in comparison with deposits during the first two months of 2011-12.

Trend in Growth of Bank Assets

In the banking system, historically, there has been a positive correlation between growth in deposits base and increase in interest rates; periods with high interest rates have seen relatively high deposits growth, as in a high interest rate regime bank fixed deposits become more attractive than many other instruments. At present, it appears that given the outlook on interest rates, banks may be able to mobilise retail deposits at a higher pace in 2011-12 than in the previous year. In 2010-11, according to ICRAs estimates, the overall deposits of private banks increased by 22%, while that of PSBs increased by 18%. Within deposits, low cost deposits (CASA, current and saving accounts) increased by 27% for private sector banks, and by 15% for PSBs. CASA deposits represented 41% of the total deposits for private banks, and for a lower 33% for PSBs. For banks, having significant low cost deposits (CASA) as a proportion of total deposits could help them keep their cost of funds under control even in a scenario of rising interest rates in the system.

DRIVERS OF GROWTH
The demand drivers for banking services can be broadly classified into the following heads:

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Market Dynamics
According to a study conducted by FICCI, the penetration of banking services stands at 35% in India, which is much lesser than other countries. Thus, with the background of lower penetration level when compared to other developing/developed nations, India has a significant potential for improvement given the vibrant economy. According to Ernst & Young, Banks aim at achieving a penetration level of 74% and 81.5% in 2013 and 2018 respectively. Financial inclusion is the next big thing when it comes to Indian financial services. Truly there does lie a fortune at the bottom of the pyramid. Out of six lakh villages only 30,000 have commercial bank branches and that too with a very much skewed distribution as there are less than three branches per 100sq.km. To address this banks have started following a life cycle approach which starts with offering deposit products like savings bank accounts and extends to credit products for earning ones livelihood or improving standard of living. Banks are developing a Mobile bank facility under which an authorised vehicle with officials of a particular bank, reaches a particular village at particular time and offers services like deposits and withdrawal. Under Financial Inclusion programme of RBI plans are afoot to cover all villages through mobile banking by 2015. The recent turmoil in the Microfinance sector has thrown another opportunity towards banks to carry forward financial inclusion by appointing Business Correspondents (BCs) in villages. A recent decision by RBI to allow banks to appoint corporates as BCs will help the banks in providing better stability and continuity of services than through individual BCs due to the organisational skill, financial resources and strong retail networks of corporates. Mergers and Acquisitions are also being seen as a way ahead for Banks to unlock their full potential. Consolidation through mergers and acquisitions are being done reduce the operating cost of banks which has increased at an annual growth rate of 21% during 2008. On the international front, deregulation of key sectors and easing of international trade barriers has to led to increasing trade between India and the world. Exports grew at a rate of 36.4% and imports at 61.6% in Q1 of the year 2010-11. Growth of trade is bound to be a major driver of growth for the banking sector.

Technology
Technology has proven to be an important growth factor for the banking industry. Besides the low level of penetration another driver for the growth of banking industry in India is the growing number of internet users. Banks have identified net-banking as the area where they need to build their expertise in order to keep up with the expectations of their increasingly net

29

-savvy customers. Banks have to provide low-cost and convenient banking services to their customers especially if they want to hang on to the huge consumer base which is expected to grow to 120 million households by 2020. Number of consumers who use non-traditional banking services such a net banking, mobile and phone banking, ATM / Credit cards etc is increasing day by day. Banks like ICICI are adopting six-sigma to reduce the transaction time to almost one third of the current transaction time. In addition to the computerization of their front-office operations, the banks have moved towards back-office centralization. Banks are also implementing Core Banking or Centralized Banking, which provides connectivity between branches and helps offer a large number of value-added products, benefiting a larger number of customers. A number of banks have joined together in small clusters to share their ATM networks. According to PricewaterhouseCoopers, banking sector spends about 46% of its technology budget in business continuity, 32% for adding product functionality and new products and the remaining 22% in technology which can change the business process.

Household Savings
Bank deposits have been the mainstay of the saving process in the Indian economy and banks have played an increasingly important role in stepping up the financial savings rate. Physical savings, nevertheless, have tended to grow in tandem with the financial savings. The salaries in India have seen a 13-14 per cent growth in recent years and the number of millionaires in India has crossed the 100,000 mark. All these things point to more money in the hands of people which needs to be managed well. The table below shows that household savings have been growing healthily over the past years thus giving banks an enormous opportunity to attract deposits and increase their reserves.
Changes in Deposits of Household Sector (at current prices)

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Year

Bank deposits

Non-banking deposits

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Source- RBI

18777 17848 29518 36236 55835 39941 50902 74099 79433 82892 94703 112936 123462 141967 158259 274864 311347 360993 409811

1286 2218 6035 11654 11547 13198 25980 6733 7670 3844 6911 7912 8788 3803 3370 6130 1516 3751 13453

CHALLENGES
While banks in India face a huge market and untapped potential, the changing economic, social and political conditions pose major challenges before them as well. With the popularization of online banking, low-cost banking is no longer a technology challenge but more of an HR challenge. Manning new bank branches is one of the highest cost components of setting up a new branch for a bank, especially Public sector banks. Besides it has become important for banks to fill the competency gap between their employees and the expectations of customers profitably to maintain their market shares in a fast and dynamic scene.

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Deregulation and easing of entry norms have made it easy for foreign players to enter India which poses a threat to Indian Banks. The threat of mergers and megamergers of foreign banks hangs over Indian banks perpetually but even without megamergers foreign banks have the potential to improve their market share given their use of sophisticated technology and capability of introducing innovative products. Asset Quality Stress: Liquidity shortage faced by small and leveraged companies might translate into a solvency crisis and uncertainty on personal incomes of the borrower has increased the risk of banks. With greater deposits and credit portfolios over the years Non Performing Assets of banks have increased as well. The increasing inflation and the stress it puts on
the repaying capacity of people is bound to adversely affect the performance of banks. Non-Performing Assets of Banks - Sector-wise

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Name of the Bank

Priority NPAs

Sector

Of which, Agriculture

Of which, Small Scale Industries

Of which, Others

Public NPAs

Sector

Non-Priority Sector NPAs

Total NPAs

Amount

Per cent to total

Amount

Per cent to total

Amount

Per cent to total

Amount

Per cent to total

Amount

Per cent to total

Amount

Per cent to total

Amoun t 15 = (3+ 11+13)

Public Sector Banks Nationalised Banks Private Sector Banks Foreign Banks

30,848 19,908 4,792 1170

53.8 56.1 27.6 16.4

8,330 5,741 2,023 -

14.5 16.2 11.6 -

11,537 8,668 1,139 299

20.1 24.4 6.6 4.2

10,981 5,499 1,630 871

19.2 15.5 9.4 12.2

524 280 -

0.9 0.8 -

25,929 15,283 12,592 5956

45.3 43.1 72.4 83.6

57,30 1 35,47 0 17,38 4 7,125

KEY PLAYERS
The Indian financial sector (including banks, non-banking financial companies, or NBFCs, and housing finance companies, or HFCs) reported a compounded annual growth rate (CAGR) of 19% over the last three years and their credit portfolio stood at close to Rs. 49 trillion (around 62% of 2010-11 GDP) as on March 31, 2011. Banks accounted for nearly 86% of the total credit, NBFCs for around 10%, and HFCs for around 4%. Within banks, public sector banks (PSBs), on the strength of their country-wide presence, continued to be the leader, accounting for around 76% of the total credit portfolio. While the Indian banking sector features a large number of players competing against each other, the top 10 banks accounted for a significant 57% share of the total credit as on March 31, 2011.

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State Bank of India (SBI)

SBI is Indias Largest Bank which is majorly owned by the Government. The Company has a number of subsidiaries and has been a market outperformer in recent times. It achieved revenues of $22 Billion. The SBI has 7 subsidiaries of which 2 have been merged and 5 remain:

State Bank of Bikaner Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore

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Key Financial Indicators of SBI March '11 3,68,283 11.98 77.19 79.9 33.45 March '10 3,18,580 13.39 74.22 75.96 36.33 Growth 1560.00% -10.5% 4.0% 5.2% -7.9%

Deposits Capital Adequacy Ratio Advances / Loans Funds(%) Credit Deposit Ratio Investment Deposit Ratio

ICICI Bank
It is the largest Indian Private Bank with operations in all Financial Services Sectors. The Company faced a bad time during the Lehman downturn but has recovered well. It achieved revenues of $12.5 Billion. ICICI Bank is also strong in almost all sectors of the financial industry and has one of the strongest management teams in the country. Like HDFC Bank majority of the shareholding for ICICI bank is with foreign investors. The company which overextended itself in the 2007-2008 boom, has now reduced the size of its risky segments and is again back on the growth trajectory.
Key Financial Ratios of ICICI Bank March '11 Capital Adequacy Ratio Advances / Loans Funds(%) Credit Deposit Ratio Investment Deposit Ratio 19.54 64.96 87.81 59.77 March '10 19.41 58.57 90.04 53.28

HDFC Bank
HDFC Bank like Axis Bank has shown remarkable growth in the last few years. It was founded by Indias largest housing finance company HDFC and has assets of around $22 billion. It is one of the best rated banks in terms of service quality and growth. The bank at present has an enviable network of 535 branches spread over 312 cities across the country. All branches of the bank are linked on an online real time basis. Its customers in 189

35

locations are also serviced through phone banking. The banks expansion plans take into account the need to have a presence in all major industrial and commercial centres where its corporate customers are located as well as the need to build a strong retail customer base for both deposits and loans products. Being a clearing settlement bank to various leading stock exchanges, the bank has branches in centres where the NSE/BSE have a strong and active member base.
Key Financial Ratios of HDFC Bank March '11 2,22,980.50 16.22 79.34 76.02 34.45 March '10 1,80,320.10 17.44 77.24 72.44 37.85

Deposits (in Rs crore) Capital Adequacy Ratio Advances / Loans Funds(%) Credit Deposit Ratio Investment Deposit Ratio

AXIS Bank
Axis Bank has been the best performing private bank along with HDFC Bank showing excellent growth in top-line and bottom-line. The Bank has been expanding into insurance and investment banking. It recently acquired Enam to this end. Axis Bank was formerly UTI Bank that began its operations in 1994. The Bank was promoted jointly by UTI, LIC and other state owned general insurers. The bank operates 827 branches and extension counters, as on 31 March 2009. Axis Bank has operations in 29 States and 3 Union Territories in India. The bank has a network of 3595 ATM machines and is the third largest ATM network provider in India.
Key Financial Ratios of Axis Bank March '11 Deposits (in Rs crore) Capital Adequacy Ratio Advances / Loans Funds(%) Credit Deposit Ratio Investment Deposit Ratio 1,89,237.80 12.65 76.16 74.65 38.71 March '10 1,41,300.22 15.8 72.96 71.87 39.55 Growth 33.9% -19.9% 4.4% 3.9% -2.1%

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FMCG Food & Beverages

INTRODUCTION
Fast Moving Consumer goods (FMCG) are alternatively known as consumer packaged goods (CPG). These products that have a quick turnover, are relatively low cost, are generally consumed on a regular basis, and are replaced within a year as compared to durable goods which are replaced over a period of years. FMCG sector has a market size of USD 29 bn roughly and is poised to become a USD 47 bn industry by 2013 and USD 74 bn by 2018, growing annually at 10-12%. The FMCG industry is the fourth largest sector in the Indian economy. Its principal segments are Household Care, Personal Care and Food & Beverages with the food segment being the largest consumption segment occupying 43% of total FMCG share. Of this, the health beverage industry is valued at USD 230 million and semi-processed/ ready-to-eat food segment is over $1.1 billion. With food and food products showing largest portion of Indian consumers spending - more than 31% share of wallet, the future prospects of food and beverage segment seem positive.

Key Products in Food and Beverages Category Category

Food and Beverages

Products
Health beverages; soft drinks; staples/cereals/bakery products (biscuits, bread, cakes); snack food; chocolates; ice cream; tea; coffee; soft drinks; processed fruits; vegetables; dairy products; meat & poultry; bottled water; branded flour; branded rice; branded sugar; juices etc.

HISTORY OF FMCG INDUSTRY IN INDIA:

Origin
Today what we call as fast moving consumer goods industry was initially kick started by Dabur some 115 years ago much before MNCs came in the scene in the Indian market. But it was with the advent of multinational companies in India that FMCG sector started evolving. After gaining independence from the early fifties MNCs were allowed to operate in India with only Hindustan Lever having a manufacturing base in India. Indian market at that time had small urban-driven demand and was cumbersome with complex regulatory policies of government

37

which prevented most of the global companies from setting their manufacturing base in India, e.g. Colgate and Nestle were there but they were mainly into trading.

Growth & Evolution

In the sixties though the Indian market was still plagued by the protectionist regulatory environment many MNCs started setting up their manufacturing base in India. It was in 1978 that the new government specified several product categories for the small-scale sector. The MNCs were then asked to choose between slashing their equity to 40% or leave. As a result IBM and Coca Cola quit India. Only Unilever stayed put with HLL around. In the food products category there were only three major players Pillsbury, Annapurna and Captain Cook. During this time Indian FMCG industry was witnessing lopsided growth as most MNCs were unrepresented, were largely dominated by unorganised players, were not able to penetrate in the rural market and suffered from high product prices driven by high costs of manufacturing, distribution and taxation and so started drifting away from Indian market.

The Dramatic Nineties

In 1991 the economic reforms of Liberalization, Privatisation and Globalisation gave a huge facelift to Indian FMCG sector. It led to rise in income levels of consumer thereby spearheading and pushing up the demand for goods and creating a huge market. It was also the same time that market for FMCG had stagnated in Europe and US and the focus of FMCG companies thereby shifted to developing markets. In the post reform era it became relatively easy to set up business in India leading to increased investment and participation from MNCs. The Indian FMCG industry changed dramatically with increase in product offerings, emergence of customer centric culture and with rise of competition among companies to grab a larger share of market. Categories within categories were created and companies started looking for ways to expand their product portfolios making acquisitions the order of the day. HLL for instance unleashed brands and in just four years gobbled up Tomco, Kwality and Kissan. Also it became imperative for companies to connect with more and more consumers to know their preferences in terms of taste and price to offer more localized products. It seemed that the excitement had just begun in the Indian FMCG industry.

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CURRENT STATE:
Macro and Micro Environment
Food Inflation During the week ended July 20 on the back of costlier onions, fruits, vegetables food inflation surged to a four and a half month high of 9.90 %. Food Inflation, as measured by Wholesale Price Index (WPI), stood at 8.04 %. A study by CRISIL Research shows that growth of private consumption expenditure in nominal terms increased to nearly 17% per year during 2008-09 to 2010-11 from 14% in the preceding 3 years mainly due to rise in food inflation. But still the Indian consumers confidence in spending according to Neilson Report July 2011 remained positive. Although with heated price inflation and an uncertain global economy acting as constraint in a positive outlook likely adjustments to the purchase basket can be seen in context of greater value-consciousness along with robust demand but with a large pull in terms of overall spending on food. In 2010 due to increase in food prices FMCG industry sprung surprises in the way the consumer responded. Mostly FMCG food industry was not affected barring few categories like baby cereals, infant food and packaged atta which witnessed decline while on the other hand impulse driven categories like chocolates and namkeens saw a good volume growth. Rise in food inflation can at times drive the shift in an uncertain manner in an attempt to combat inflationary pressures and can put pressure on volume growth. Government Policies: Indian government in order to attain international competitiveness in the food and beverage industry has enacted many policies to boost rural consumption. Four Pronged Strategy: Government has launched a four pronged strategy to promote agriculture sector. This strategy includes extending the green revolution to the eastern states, reduction of wastage in produce, increase in credit support and thrust on food processing sector. Vision-2015 action plan: Indian government had formulated the Vision-2015 action plan to help food processing sector to prosper. Through this the government aims to treble the size of this industry thus increasing the level of perishables from 6% to 20% thereby expanding the value addition from 20% to 35% as well as strengthening the nations share in global food market from 1.5% to 3%. Further this will help in strengthening the FCMG food industry. Central and state initiatives: Many states have started encouraging companies to set up manufacturing facilities in their regions by providing fiscal incentives. In the Union Budget 2010-11 concessions and exemption of duties on handling and racking equipment in warehouses and mandis has been given and there are various schemes which have been proposed for rural development which will

39

help improve the living standards in the rural area and help provide FMCG companies better access to the rural heartland. Exports: According to the Agriculture and Processed Food Products Export Development Authority (APEDA) exports of organic food are expected to grow five-fold by 2015. The annual report of APEDA shows that exports of floriculture, fresh fruits and vegetables, processed fruits and vegetable, animal products, other processed foods and cereals stood at USD 5.45 billion as on November 2010-2011. According to spice board exports of spices from India during 2010-11 has registered an all-time high both in quantity and value. But still export levels are low as compared to other countries and government is framing policies to give a boost to exports.

MAJOR SEGMENTS/SUB SECTORS: Segment

Fruits & Vegetables, Cereals and consumer foods (includes packaged food and packaged water) Dairy Products Meat & Poultry Snacks & Confectionary Beverages

Key Players
Pillsbury, HUL, AgroTech, ITC, Bisleri, Parle Agro

Amul, Britannia, Nestle Hind Agro Industries Group, Al Kabeer Britannia, Parle, ITC Ltd, VH

Glaxo SmithKline, Cadbury, Nestle, Amul, HUL, Tata Tea, Pepsi, Coca Cola

Fruits & Vegetables, Cereals and consumer foods (includes packaged food and packaged water): According to Opportunities in Food Industry report by Ernst & young as much as 70% of the current food spending by the Indian consumer is on agricultural products. Additionally, two-thirds of this spending is on primary and secondary processed products. In agricultural products fruits and vegetables is the largest consumption category and accounts for over 50% of the total consumption. The processed food industry in India is at an early stage with low penetration and high potential. For example only 2.2% of the total production of food and vegetables is processes, as compared to 65% in the US or 23% in China. Dairy (Milk and milk based products) : Being the worlds largest producer and consumer of dairy products, India represents one of most lucrative dairy markets but still it has an insignificant share in the global market owing to low quality and hygiene standards across the value chain. IMARC Group, one of the worlds leading research and advisory firms, finds

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that the sales of dairy products in India will nearly double its size from INR 2.6 Trillion (US$ 60 Billion) to around INR 5.1 Trillion (US$ 115 Billion) by 2016. Meat & Poultry: India has a processing capacity of approximately 25,000 birds per hour with average utilization of 30%. There are 12 state of the art integrated meat processing units in India. Snacks & Confectionary: This segment includes biscuits, breads, cake, snake food and chocolates. Bread and biscuits constitute USD 1.7 billion of food sector in India. Chocolate market in India is pegged at Rs 2,000 crore and is growing at the rate of 18 -20 per cent per annum. Catering to domestic and international needs many confectionary units and starch/ glucose/sorbitol producing units have come up. Beverages: This segment includes tea, coffee, soft drinks and health beverages. According to the report by intergovernmental group on tea, tea penetration in India is 95% and branded tea penetration is 85% and unbranded tea penetration is 50%. In soft drink segment market is predominantly urban with 25% contribution from rural area. Coca Cola and Pepsi dominate the Indian soft drink market.

Fig1. Split of spending within the key categories.

Source: E&Y analysis

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INDUSTRY DRIVERS
Increasing disposable Income: Over the last 18 years, per capita urban disposable incomes have steadily increased at CAGR of 5.4%, significantly ahead of the rural incomes. According to estimates by McKinsey, over the next few years, growth of urban disposable incomes is likely to accelerate at CAGR of 6.4%. With steady rising incomes and the culture of consumerism increasing, we believe that there is significant opportunity in food sector as 31% of the spending is made on food consumption. Investments: With growing competition to acquire larger market share the companies are trying to expand their product portfolio and this has made Mergers & Acquisitions the new b u z z w o r d .

Industry Infrastructure (shopping malls, hypermarkets): According to IBEF report India has a well-established distribution network spread across six million retail outlets (including two million in 5,160 towns and four million in 627,000 villages). Also India has 60 Agri-Export zones and in the budget 2010-11 the corpus of Rural Infrastructure Development Fund has been raised from Rs160 billion to Rs180 billion, with the additional allocation dedicated to the creation of warehousing facilities. . Availability of raw materials: India is the largest producer of milk, sugarcane, spices, coconut and cashew and second largest producer of fruits and vegetables, rice and wheat. The availability of these raw materials is a quite beneficial for boosting growth of food industry in India.

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Emerging food products: Growth in food segment is expected to rise driven from emerging food products like juices, milk powder, baby foods etc. With more disposable income and preference or convenience these products are all set to take off especially in urban areas. According to AC Nielsen report the breakfast cereals are expected to deliver a medium-term growth rate of 20-25% with currently the breakfast cereal being worth Rs5bn.

INDUSTRY CHALLENGES
Food inflation: The demand-supply condition in global food sector keep on undergoing significant change due to global food inflation. It further leads to the disruption in food supply creating uncertain market conditions and at times increasingly exerts influences on both sides of demand supply equation so in current uncertain global economy it becomes a big challenge to control the food prices. Also in developing countries we can see burgeoning demand for food products which threatens further rise in food prices. Huge untapped rural opportunity: Almost one-third of total consumption pie in India is accounted by rural India. Indian rural market is currently worth $ 9 bn and is expected to become $100 bn market by 2025. So now the FMCG companies are adopting extensive marketing techniques especially for rural markets. Robust consumption in the rural economy is one of the key drivers of sustained growth. Input cost pressure: With the spearheading rise in inflation, the food and fuel costs have hiked up to enormous levels. This has led to the increase in transportation costs and in hiking the price of raw materials thereby raising the manufacturing costs of products. It has led to increase in product prices leading to reduce in purchase power of consumers. Wastage: At present wastage of perishable food and vegetable items amount to about Rs1 lakh cr annually due to lack of storage and food processing facilities and poses as one of the biggest challenge. So, there is a stringent need for agricultural reforms especially in making large investments in development of post-harvest and cold chain infrastructure in India. Low Demand: The price gap between farmers realization and consumers final price is very big caused by low productivity, high cost of production, spoilage due to poor infrastructure and high cost of borrowing.

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MAJOR PLAYERS FOOD & BEVERAGES

Company
Hindustan Unilever Ltd.

Sales
Approx $ 3.1 billion

Brands
Brooke Bond, Annapurna, Kissan, Knor, Kwality Walls

Products
Tea, coffee, biscuits, ice creams, atta, instant drinks, soups,jams and squash and host of other FMCG products Chocolates, snack foods, milk, coffee, infant food etc Biscuits, flavoured milk, dairy whitener, ghee, bread, cheese, cake etc. Juice, honey, spices, cooking pastes, coconut milk etc. Branded atta, biscuits, packaged food Ice-cream, skim milk powder, ghee, dairy whitener, paneer, shrikhand, pizza, cheese, butter etc. Chocolates, Malt Food, Cocoa powder etc. Carbonated drinks, juices, snack foods etc. Carbonate drinks Health beverages

Nestle India

Approx $ 832 million Approx $ 556 million

Nestle, Maggi, Nescafe etc Britannia, Tiger, Bourbon, GoodDay etc.

Britannia Industries Ltd.

Dabur India Ltd

Approx.$ 600 million

Dabur, Real, Activ

ITC Gujarat Cooperative Milk Marketing Federation

Kitchens of India, Aashirvaad, Sunfeast, Bingo Amul

Cadbury India Ltd. Pepsi Co.

Approx $ 330 million Approx$ 729 million

Dairy Pepsi,

Milk, Perk, Five star, Gems etc. Frito-lays

Coca Cola Glaxo Smith Kline

Coke Horlicks, Maltova, Boost

TRENDS
Consolidation: Indian FMCG companies are trying to focus on certain market segments and are trying to consolidate their existing business portfolios. Dabur India Ltd merged its wholly owned subsidiary, Dabus Foods Ltd, with itself. Agro Tech Foods Ltd, and Indian subsidiary of global food major ConAgra, exited from its sourcing and institutional business of oil and agricultural raw- material procurement business.

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Product Innovation Several companies have now taken to innovation by launching or customizing their existing product portfolios to meet new customer segments demands and preferences. Nestle India and Amul have launched pro-biotic products by providing active ingredients in regular consumable products such as curd/yoghurt and ice cream. Third-party manufacturing Many FMCG vendors are outsourcing the manufacturing or processing of certain range of products to small vendors. Glaxo Smith Kline consumer Healthcare Ltd outsources the processing of products such as malt-based foods, biscuits and nutrition bar sweetmeats to third-part vendors. Hindustan Unilever Ltd outsources the processing of its products such as packaged tea to third-party vendors. Expanding horizons Several companies are now looking forward to explore and expand the business potential of overseas markets and under-penetrated regional markets. Tata Tea acquired a 30 percent stake in US based energy Brands Inc, a specialty water company.

PRICING POWER/PRICE COMPETITION

Pricing power refers to the bargaining power of buyers. In an environment where inflation is on a rise and there is an environment of volatile commodity prices where cost is on a rise, majority of FMCG companies in India are struggling to pass on the price increases to consumers. The input cost index for FMCG companies has increased over the past 6-12 months as agriculture and crude-linked input prices have increased. Sugar prices have corrected, tea prices are firm and milk and wheat prices are ruling steady. Competition in the Indian FMCG sector is increasing with an increase in realization of growth potential but dominance insures pricing power for a few companies only due to strong category leadership and inherent characteristics of the category. Market leadership provides for pricing power to ITC and GSK has pricing power due to its brand equity and lack of price led competition.

MARKET SHARE STABILITY

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Source Central Statistics Organisation

Segment wise market share:

Agri-products: Fruits & Vegetables Predominantly food and vegetables are consumed by Indians in the primary form but with the evolving lifestyle tertiary sector is increasingly gripping its hold on the wallets of the consumers. According to Ernst & Young Economic Survey 2007-2008 consumers spent USD 50,849 million on food and vegetables in primary form and USD 9600 million in these products in tertiary form. Grains & Cereals- Due to wheat flour and rice being a part of the staple dies of Indians a considerable amount of money is spent on grains and cereals. This category is mostly dominated by unbranded and unorganised players with very few players organised players like Aashirvaad wheat flour from ITC and Samrat wheat flour from Pharak Agro Ltd.

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Beverages- The total size of the Indian beverages industry (including both carbonated & noncarbonated drinks) is Rs.7,500 crore. In this segment majority is dominated by carbonated drinks in which the top players are Coca-Cola and PepsiCo. The market for fruit juices is not much developed with Dabur being the major player with brands like Real and Activ. Fig --shows market distribution of beverages.

Dairy Products: The dairy industry in India is expected to grow at 4-5% per annum with currently being estimated at 130 million tons. Another significant feature is that still this sector is dominated by unorganised sector as compared to the organised sector. Fig--- shows us the market share distribution of dairy sector.

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COMPETITIVE ANALYSIS
Coca Cola India & PepsiCo
Coca Cola and Pepsi are the two most recognised brands in the carbonated beverages segment in India.
Product Mix Width Soft Drinks Pepsi Pepsi 7 Up Orange Mirinda Mountain Dew Lemon Mirinda Slice Diet Pepsi Evervess Soda Coke Coca-Cola Sprite Fanta Thumps Up Limca Maaza Diet Coke Kinley Soda Pepsi AquaFina Drinking Water Coke Kinley

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Pepsi
Coke had a small presence in India before pulling out in 1977 after new government regulations would have forced it to partner with an Indian company and share the drink's secret formula. In 1988, PepsiCo formed a joint venture with two Indian companies and introduced products under the Lehar brand. (Lehar Pepsi was introduced in 1990.) Coke reentered the market in 1993, after Indian regulations were changed to allow foreign brands to operate without Indian partners.

Coca-Cola
Coca-Cola Company entered the Indian market in 1970s but due to government regulations left India in 1977. When it returned to the country in 1993, Coke acquired three local brands: Thums Up cola, a lemon drink called Limca, and an orange drink known as Gold Spot. It has since added more drinks to its portfolio. Today, Coke's top three products in India by sales volume are Kinley bottled water, Thums Up, and Sprite, according to Euromonitor.

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In the Spotlight
News & Recent Developments
August13, 2011 Ministry of food processing industries has allocated Rs595 crore for schemes in food processing sector in 2011-12. The details of the funds allocated scheme-wise are as under.
Name of Scheme Scheme for Infrastructure Development Scheme for Technology Upgradation / Establishment/ Modernization of Food Processing Industries Scheme for Quality Assurance, Codex Standards and Research & Development and Promotional Activities Scheme for Human Resource Development Strengthening of Institutions Lump sum provision of NER Funds Allocates (2011-12) (Cr) 300.00 98.00 45.00 15.00 137.00 *

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August 9, 2011 The Indian dairy sector will be grossly impacted by the Union governments effort to include milk products within the domain of the prposed Free Trade Agreement (FTA) between India and New Zealand. In 2010, the Government of India permitted import of milk powder to the extent of 45,000 tonnes. The Government also banned export of milk powder and casein estimated to be another 75,000 tonnes. The stoppage of exports and encouraging imports has itself created milk surplus in the country. At this juncture, proposal to import another 20,000 tonnes will lead to a dumping situation which is totally avoidable, according to industry sources. June 30, 2011 CRISIL Research reveals that surging inflation costs Indian households additional Rs5.8 trillion during 2008-09 to 2010-11. The study shows that growth of private consumption expenditure in nominal terms increased to nearly 17% due to rise in food inflation. The inflation was however not uniform and food items saw a much sharper price increase as compared to non-food items. Food Inflation was at 11.6% during 2008-09 to 201011 as compared to non-food inflation of 5.7 %. Source - http://www.fnbnews.com

WHAT LIES AHEAD

Growth Outlook
Growth of FMCG Food & Beverage sector to a large extend depends on the impact that the Union Budget 2011-12 will have on the food and Beverage Industry.

Key Features of Union Budget 2010-2011

The provision of INR400cr to strengthen green revolution in Eastern India, namely Bihar, Chattisgarh, Jharkhand, Uttar Pradesh, Bengal and Orissa. The provision of INR300cr for rain-fed areas to organize 60,000 pulses and oil seed villages and also the provision of water harvesting watershed management as well as soil health to increase productivity of dry farming areas. Government will address the issue regarding the opening up of retail trade that will close the gap between farm gate, wholesale and retail prices. The government will add another five mega food parks, hence bringing Indias food parks to a total of fifteen. Cold storage and cold room facilities (including farm level pre-cooling and preservation or storage of agricultural and allied produce, marine products and meat) will be available through External Commercial Borrowings.

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All these features of the Union Budget give a positive outlook towards the FMCG food and beverage industry in India. Spending on improving warehousing and cold storage facilities will prove beneficial for farmers and food processing units as food wastage will be decreased. Also nations per capita disposable income is expected to double to a projected USD 1150 by 2015. Also the consuming population in India was 26% of its total population in 2003 and is projected to double to reach 54% in 2015 and the consumer base is expected to treble to become the fifth largest in the world by 2025.

Factors Driving Growth

Huge unorganized sector- There is a huge penetration and presence of unorganised sector across categories which provide a huge potential and opportunity for organized players to enter and penetrate this market. Favourable Consumer Trends- With fast evolving lifestyles and with consumers becoming highly adaptable to new and innovative products demand for high end and tertiary products is expected to grow thereby creating more opportunities for businesses to tap to. For e.g. the domestic spending on potato chips is expected to increase by three times by 2015 and reach a market size of USD 1441 million. Price Competitiveness India and multinational FMCG players can leverage India as a strategic hub for low-cost competitive and product development market. Hence streamlining the supply chain would help to control product price and improve competitiveness.

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Geographical Advantage India being the largest producer of milk holds a unique geographic advantage of being in close proximity to milk deficient countries like Bangladesh and Sri Lanka where large quantities of milk is imported and this gives India an opportunity to tap this market. FDI in retail- Already the global retail giants like Metro has a retail footprint by over five stores in India through cash and carry format; the worlds biggest retailer Walmart is into a joint venture with Bharti and Indian conglomerate and is operating in India as part of Bharti Walmart of Cash & Carry retail stores. Once 51% FDI in multi-brand is announced the retail sector in India will go for a makeover.

Factors that can hinder growth

Poor Warehousing facilities - At present wastage of perishable food and vegetable items amount to about Rs 1 lakh crore annually due to lack of storage and food processing facilities. Large unorganized sector In India unorganized sector constitutes 75% of the food processing industry and is limited to local presence in which it lacks access to knowledge, technology and marketing network which prevents it from efficient utilization of resources. Price gap - The price gap between farmers realization and consumers final price is very big caused by low productivity, high cost of production, spoilage due to poor infrastructure and high cost of borrowing.

FUTURE OUTLOOK & CONCLUSION

FMCG industry on hand has a huge scope to expand and grow owing to higher disposable income led by income tax cuts but on the other hand due to increase in inflation the FMCG prices are expected to hike. FMCG companies like HUL, Nestle, Dabur India have large manufacturing plants in excise-free zones that are not affected by a hike or cut in excise duty while higher cost of production will inevitably cause price hike. Establishment of five additional food parks will boost the food processing industry.

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FMCG Non-Food

INTRODUCTION:
Former U.S president Mr. George W. Bush once famously remarked that the Indians (along with the Chinese) eat so much that they almost drive the world food prices. The remark was taken in an offensive way but he had his point. The purchasing power of the Indian middleclass has increased multiple-fold over the last two decades, resulting in an everyday quest for increase in standard of living. This has brought about the rise of a number of sectors on the Indian business front, the first being Fast Moving Consumer Goods. But was his comment limited to food in particular or the Indian consumption in general? No wonder India is among the top consumers in the world when it comes to food, owing to its large population. But the above question, if valid, qualifies the Indian FMCG market to be divided into two parts, namely: 1) Foods 2) Non Foods Fast moving consumer goods are products that are produced at a low cost and sold quickly. Another important differentiating factor for the sector is that the products are non-durable. The per-unit cost of production is low. Also, the per unit profit is minimum. Thus, FMCG is a sector driven by volumes and sales. As the consumption of the products is very rapid, there is a constant demand for the products as they satisfy the daily needs of consumers. The profit is visible only on selling the products on a mass scale. But this trend has changed these days and the profit is said to be a function of both volume and value. Another interesting concept that characterizes this sector is the change in thought process from Value for Money to Money for Value, a representation of the change in the centre of the sector as a whole from supplier to consumer. FMCG sector is also characterized by the following: 1) Well established distribution network 2) Low penetration levels 3) Low operating cost 4) Low per-capita consumption 5) Intense competition between organized and unorganized segments. The following are the challenges for the FMCG sector:

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1) Complicated Tax Structure 2) Goods and Services Tax implementation 3) Fragmented and weak agricultural supply chain

4) Bureaucratic and regulatory process

HISTORY:
It is very difficult to differentiate the growth of FMCG foods and non-foods separately. The primary challenges have always been common to both the sister sectors. Though the analysis is for non-foods sector, most of the points are applicable to foods sector too. They can be summarized as follows : 1950s to 1970s (Lackluster Stage): 1) Low purchasing power of the Indian population from 1950s to 1980s 2) The governments intentions to develop the small-scale sector and allocation of a number of product categories to them 3) License Raj and unstable business environment 4) Companies focusing primarily on the urban sector 5) Difficulty in changing the traditional mindset of the Indian consumer 6) Lack of technological advancement (Both for setting up manufacturing units and subjecting the consumer to product visibility) 7) Difficulty in running manufacturing units and unavailability of skilled labor 8) Very few companies operating in the market. 1970s and 1990s (Rural Sensitization Stage): 1) Focus on low income group markets. Started with the introduction of Normal Washing Powder 2) Implementation of the idea using the Value for Money idea 3) Wake-up call to companies to realize the potential of the rural and low income group markets. 4) Tapping of rural markets initiated by not so famous companies. For example, shampoo

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market got a boost in rural India through the introduction of sachets by Cavinkare for its Chik brand 1991-2000 (Liberalization Boom and Stabilization Stage): 1) Lowering of trade barriers to facilitate entry of Foreign players 2) Initiation of competition between domestic and imported products 3) Targeting of both rural and urban markets 4) Drastic increase in purchasing power of consumers 5) Importance to the concept of Distribution to gain advantage over competitors 6) Upgradation of existing consumers to premium consumers and attempts to add new consumers to gain market share 7) Capture of market of consumers with high purchasing power but limited choice till then 8) Sales boom for 4-5 years but stabilization reached after that. 2000-2005 (Drop Stage): 1) Entry of many new players. Made it difficult even for HUL and P&G to hold on to their market share 2) Very less growth rate recorded in the market 3) Double blow to the Indian economy in the form of economic slowdown and very low agricultural output (Continuous years of famine). Consumer forced to spend less. Consumer movement from high-end to low end brands to reduce monthly expenditure 4) Drop also attributed to new avenues of expenditure for consumer such as consumer durables, entertainment, mobiles, motorbikes etc. 5) Indian consumers shift towards the new basket of products at the cost of FMCG 6) Problem tackled by offering smaller versions of products at lower prices. Low unit packs saw robust growth 7) Even high penetration products such as soaps and detergent bars shrunk in value. Only staple foods such as salt and atta managed to record superior growth rates (Worth mentioning though they come under foods sector)

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2005-Present (Boom Revisited Stage): 1) FMCG non-foods started making profits back in 2006. From a loss of 3% in 2004, the FMCG sector registered a growth of 24% in August, 2006. The following are the reasons: a. Increased disposable income b. Organized Retail boom c. Increased rural penetration d. Availability of the above mentioned basket of goods for cheaper prices by 2006 due to cheaper products and EMI culture, thus prompting consumers to revisit FMCG sector at a larger scale.

CLASSIFICATION:
FMCG products in the non-foods category are classified as follows: 1) Household Care: It can be divided into the following categories: A) Fabric Wash: It can be classified into two types: Laundry Soaps (Oil-based soaps): i) Hand wash detergents comprise of more than 52% of the sales

ii) First half of last year witness to an intense price competition between HULs Rin and Surf and P&Gs Tide and Tide Naturals iii) HUL had to slash its prices by 30% as P&G started building up on its market share due to Tide Naturals launched in 2009 started building up on its market share iv) Domestic brands like Nirma and Fena adversely affected v) HUL remains the market leader with 39% market share vi) HUL dominates premium and mid-priced segment and Nirma dominates low-priced segment Synthetic Detergents: i) Classified into premium (Surf, Ariel), mid-priced (Rin, Wheel) and popular segments (Nirma) which account for 15%, 40% and 45% of he market respectively

ii) Market dominated by 2 players HUL and Nirma

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iii) HUL (with Surf Excel) and P&G (with Ariel) constitute 90% of the premium market. The remain 10% is shared by Henkel and other players iv) Popular segment almost completely dominated by Nirma. v) HUL (40%), Nirma (30%) and P&G (12%) are the leading players in the market Note: India has ample supplies of caustic soda and soda ash, the primary raw materials required in the production of soaps and detergents, leading to their low costs B) Household Cleaners: It can be classified into the following categories: Dish/Utensil Cleaners: i) Bars account to 60% of the market whereas powders are limited to 32%

ii) Penetration of liquid dishwash products very less in rural areas iii) 50% of urban population and 80% of rural population still using substitute products like ash, bricks and other detergents Floor Cleaners: i) Reckitt Benckisers Lizol leading the market with about 50% of the market share. Market share falling due to entry of new players

ii) Other players like Domex from HUL and Easy-Off Bang from Reckitt Benckiser too losing market share due to entry of new players iii) Mr. Muscle from S C Johnson and Dazzl from Dabur leading the growth of new entrants Toilet Cleaners: i) Market estimated at over 60 crores per annum

ii) Very less popular in India iii) Only 3% of the Indian population use toilet cleaners. Rest use phenyl, acid, bleaching powder etc. iv) Harpic from Rectitt Benckiser leading the market with 70% share v) Competing products include Domex from HUL. Air Fresheners: i) Market broken up into aerosols, gels liquids and cakes which evaporate at room

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temperature ii) Leading brands are Air Wick from Reckitt Benckiser and Ambi Pur from P&G (Belonged to Godrej Sara Lee Industries earlier) Insecticides and Mosquito Repellants: i) Overall growth of 12% triggered by rural India. Decline in urban India

ii) Coils dominate this sector followed by liquid vaporizers and mats. iii) Seasonal variations in sales iv) Growth of coils declining. Usage of mats declining due to convenience offered by liquid vaporizers. Aerosols fastest growing segment. v) Leading players are Godrej (GoodKnight and Jet brands), S C Johnson (AllOut) and Reckitt Benckiser (Mortein). Mosquito repellants form a major share of the market. vi) GoodKnight fast challenging AllOuts undisputed leadership in liquid vaporizer segment through GoodKnight Advanced Active Plus

2) Personal Care: It can be divided into the following categories: A) Oral Care: It can be divided into the following categories Toothpaste: i) Indias consumption of toothpaste is one of the lowest in the world

ii) Industry expected to grow at 5.1% next year iii) Colgate is the market leader with a market share of 51.2% followed by HULs Close UP. Dabur (Dabur Red, Meswak) and GSK(Sensodyne, Aquafresh) are the other major competitors iv) Toothpaste market estimated to be Rs. 3200 crore, followed by toothbrush (Rs. 800 crore) and tooth powder (Rs. 300 crore) v) Mouth wash category rapidly gaining popularity. Comprises of a Rs. 100 crore market. Likely to capture a good percentage of the toothpaste market in the coming few years. B) Skin Care: Growing at a rate of 19%. Awareness about benefits of skin care products and effective procedures are major contributors to growth. Facial skin-care sub-segment is

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outperforming overall skin-care market. Gender-specific products have registered rapid growth over the last few years. a) HUL is the market leader with 56% market share in 2010 with its products Fair and Lovely, Ponds and Lakme. Leadership primarily due to extensive distribution, promotion through free samples and introduction of variants in major brands b) Garniere is the second leader with a 6% market share It can be divided into the following categories: i) Creams

ii) Lotions iii) Gellies C) Hair Care: Rs. 10000 crore market growing at a CAGR of 15-20%. One of the most profitable sectors in India. Forms an eighth of the FMCG sector. Hair Oils: i) Very large penetration rate of 88%. Constitutes 52% of hair care market in India

ii) Marico (Parachute) is the market leader with Dabur (Vatika) close behind. Emami (Navaratna) (hair cooling oil) and Bajaj Corporation (Almond Drops) are the other leading competitors. iii) Success primarily due to wider distribution network and conversion of non-branded hair oil users to branded hair oil users iv) Coconut oils form 50% of the market. Other brands are generally called premium brands. They are primarily urban-centric v) Cooling hair oil is the fastest growing product in the hair oil segment. It is a seasonal product. 67% of its sales take place in summer. Shampoos: i) Market estimated to be Rs. 2500-3000 crore with a penetration power of only 13%

ii) HUL is the market leader with a market share of 44% through its Clinic and Sunsilk brands. P&G is the second with a market share of 25% through its Head and Shoulders and Pantene brands. HUL gets 7-8% of its revenue from shampoos. P&G gets 15-17% of its revenue from shampoos.

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iii) The last year has seen a series of price wars. Price wars in the shampoo segment initiated by P&G by mean of increasing quantity at no extra cost. iv) Sachets major contributors to growth. Hair Gels: i) Rapidly growing segment in the last decade

ii) Marico is the market leader (20% market share) (Parachute advanced hair cream), followed by Brylcreem (by Zetra) ans Sunsilk (HUL) D) Personal Wash: It is divided into the following categories: Soaps: i) Rs. 4800 crore market. Penetration of 88.6%(toilet soaps) in India.

ii) Industry growing at 15% iii) Leading players are HUL(64%) (Lux being their major brand), Nirma (16.8%) and Godrej (Cinthol) iv) Many other players in the market. Cosmetic and Toiletries Talcums Deodorants: i) Market of Rs. 10,543.3 million in 2011. Estimated to grow to Rs. 13,340.7 million in 2012

ii) Divided into Deodorant Roll-Ons and Deodorant Sprays iii) Deodorant spray market is Rs. 10, 421.7 million. Rollo-Ons have a market of Rs. 121.6 million iv) Top 5 players are Axe, Set Wet, Wild Stone, Spinz and Fa v) More emphasis on female deodorants of late due to less choice for them vi) Increase in market due to increase in incomes and change in lifestyles vii) Non-seasonal products but sales increase 30-40% in summer viii) Retail groups like Future Group are rolling out their own range of deodorants Perfumes:

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a) Increasing by the sentiment of developing personality b) Market worth Rs. 300 crores. Increasing at a rate of 100% c) Credit for high revenues gos to marketing strategies. Brands usually endorsed by celebrities d) Leading players in order are Christian Dior, Hugo Boss, Kalvin Klein, 10 Corso Como, Turmeric and Roses, Napthalene and Indole, Fish Auction e) Market completely divided for men and women E) Paper Products: It is divided into the following categories: Tissues: i) In nascent stage in India

ii) Increase in usage due to increase in disposable income in India iii) Indian tissue paper market is 30000 tonnes per annum iv) Entry of new players like BILT would also increase capacity v) Industry growing at approximately 7-8% Diapers: i) Market change from a niche segment to a highly profitable segment

ii) Market had not grown by leaps and bounds in the past due to high prices iii) Market expected to grow at a CAGR of 16% till 2013 iv) Diaper brands have been trying to correct the price value equation and have been offering technology-driven products v) Key players in baby diaper segment are Pampers (P&G) (56%), Huggies (Kimberly Clark) (32%), Snuggy (Godrej) and Baby Soft (Wipro) vi) Huggies is the product of the JV between HUL and Kimberly Clark

Sanitary Napkins: i) Market worth Rs. 1,350 crores in India

ii) Very low penetration

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iii) Market leaders are P&G (Whisper) and Johnson & Johnson (StayFree) F) Shoe Care: i) Running by the sentiment of professionalism

ii) 60 crore market in India iii) Leading players are Kiwi (S C Johnson) (acquired rights to sell it in India from Sara Lee in March, 2011. Godrej held the license earlier) and Cherry (Reckitt Benckiser) 3) Cigarettes: i) Market estimated to be Rs. 1700 crores

ii) Characterized by extremely high excise duties in India iii) Ban on advertisements iv) Major players are ITC (More than 60% of market share) (brands are Gold Flake, Wills, Scissors, Capstan, Bristol), Godfrey Philips India Ltd. (market share of 13%) (brands are Four Square, Red & White and Cavenders) and VST (market sgare of 4%) (brand is Charminar) v) FDI in tobacco industry had been banned in April, 2010 4) Alcohol: i) Market valued at Rs. 97910 crores in 2009 and expected to increase at 12% CAGR to 1,75,950 crores in 2014

ii) United Breweries is the largest player with a market share of more than 48%

RECENT PERFORMANCE AND TRENDS:

India is the fourth largest market for Fast Moving Consumer Goods with a market share of $13.1 Billion in 2010, growing at a little over 13%. FY11 started off very well for the sector, showing very high growth and margins. But as the year progresses, inflation became a major challenge. Input costs continued increase and margins came under pressure. The companies chose to increase prices judicially due to fear that high product prices would trigger down trading or demand. Thus, though companies registered topline growth, their margins showed a downward trend. Another factor that contributed to decreased margins was the increase in

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advertising budgets. The following aspects of the budget have been favorable to the FMCG non-foods sector: 1) Focus on rural lending and increase in capital of rural banks will help farmers access cheap loans. Further, extension of repayment of loan and concession for timely repayment helps reduce the burden on farmers. 2) Various schemes for rural development will help improve the living standards in the rural area and help provide better access to the rural heartlands. 3) Readjustment of tax slabs will help increase the disposable income in the hands of consumers. 4) Concessional duties and exemption of service tax will help boost setting up of cold storages, cold units and refrigeration units. 5) Reduction of excise duty on sanitary napkins and diapers will help reduce prices on these items. The following aspects of the budget have been unfavorable to the FMCG non-foods sector: 1) Withdrawal of exemption on excise duty on various ayurvedic and paper items will increase their prices.

FDI:
FDI trends in FMCG sector are similar in both and non-foods sectors and they are looked at in combination. An analysis of FDI in FMCG sector has been provided in FMCG foods sector. Following this is an analysis of 3 major players in FMCG non-foods sector: Hindustan Unilever Limited, Procter & Gamble and Godrej Consumer Products Limited.

Hindustan Unilever Limited 1) History: 1933. Established by Lever Brothers. Came to be known as Hindustan Lever Ltd. through a merger of Lever Brothers, Hindustan Vanaspati Mfg. Co. Ltd. and United Traders Ltd. Renamed Hindustan Unilever Limited in 2007. 2) Chairman-Harish Manwani, CEO-Nitin Paranjpe

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3) Revenue-$4.46 billion 4) Parent country of Unilever-Netherlands 5) Brands-Kwality Wall's ice cream, Knorr soups & meal makers, Lifebuoy, Lux, Pears, Breeze, Liril, Rexona, Hamam and Moti soaps, Pureit water purifier, Lipton tea, Brooke Bond (3 Roses, Taj Mahal, Taaza, Red Label) tea, Bru coffee, Pepsodent and Close Up toothpaste and brushes, and Surf, Rin and Wheel laundry detergents, Kissan squashes and jams, Annapurna salt and atta, Pond's talcs and creams, Vaseline lotions, Fair and Lovely creams, Lakm beauty products, Clear, Clinic Plus, Clinic All Clear, Sunsilk and Dove shampoos, Vim dishwash, Ala bleach, Domex disinfectant, Modern Bread, Axe deosprays and Comfort fabric softeners. 6) Distribution Channels: Distribution network covers 1,00,000 villages directly in India. Company claims that two out of every three Indians uses HUL products 7) Project Shakti: Hindustan Unilever's Shakti Entrepreneurial Programme helps women in rural India set up small businesses as direct-to-consumer retailers. The scheme equips women with business skills and a way out of poverty as well as creating a crucial new distribution channel for Unilever products in the large and fastgrowing global market of low-spending consumers. By 2010 the Shakti network reached 600 million consumers. 8) Project Shakti contributes to 10% of rural turnover nationally. In most Shakti markets, HUL is dominant and enjoys a market share which is qualitatively better as compared to non-Shakti markets. The relationship of Shakti entrepreneurs is forged by their home to home contacts and goes a long way in building brand loyalty. 9) Shakti initiative can be described in many ways as a sales and distribution initiative that delivers growth; a communication initiative that builds brands; a microenterprise initiative that creates livelihoods; and a social initiative that improves the standard of life in rural India by providing quality products. What makes Shakti scalable and sustainable is the fact that it contributes not only to HUL's business, but also to the community it is a part of. 10) Controversies of HUL: Advertisements depicting dark women being ignored by employers for Fair & Lovely created a rage in 2007 and HUL was forced to withdraw them due to accusations of perpetuating racism 11) Brand Ambassadors:

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a. Priyanka Chopra and Shahid Kapoor-Bru b. Asin Thottumkal-Lux

Godrej Consumer Products Limited 1) History: Part of the erstwhile Godrej Soaps Limited and demerged into Godrej Consumer Products Limited in 2001 2) Chairman-Adi Godrej, Managing Director-A Mahendran 3) Revenue: Rs. 3643 crores 4) Manufacturing facilities in Madhya Pradesh, Assam, Himachal Pradesh and Sikkim 5) Products: a) Cinthol Soap: In this segment, Godrej competes with Lux and Lifebuoy of HUL and Nirma b) Godrej No.1: Godrej Powder Hair Dye: In this segment, Godrej competes with Black Rose, Super Vasmol and LOreal c) Godrej Shaving Cream: Competitors are Gillette, Old Spice and Palmolive d) GCPLs talcum powde brands: Primary competitors are Ponds by HUL and Denim e) Ezee Liquid Detergent: Competes with Surf Excel of HUL, Safewash-Wipro and Genteel f) GoodKnight and Jet: Range of mosquito repellants that compete with S C Johnsons AllOut, Reckitt Benckisers Mortein and a few unorganised players. 6) Mergers and Acquisitions: a) Sara Lee Corporation (USA): Godrej initially had an nlisted JV with Sara Lee Corporation and held a 49% stake in it from early 2010. Subsequently, an agreement was reached and Godrej acquired the remaining 51% in May 2010 b) Acquired Keyline Brands Limited (UK) (2005) c) Acquired Rapidol (Pty) Limited in 2006 d) Acquired Godrej Global Mid-East FZE in 2007 e) JV with Hygiene Products AB, Sweden in 2007

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f) Acquisition of Megasari (Indonesia) a. Kareena Kapoor-Lakme

Procter & Gamble 1) History: History: Started by William Procter and James Gamble in 1837. Became famous by supplying soap and candles to Union Army during Civil War. P&G India started as a 100% subsidiary of P&G, USA. First Launch: Ariel Super Soaker 2) President and CEO: Bob McDonald 3) Revenue: $78.938 billion 4) Brands in India: Ariel, Crest/Oral B, Duracell, Gillette, Gillette, Head & Shoulders, Mach 3 (Gillette), Olay, Old Spice, Pampers, Pantene, Pringles, Tide, Vicks 5) P&Gs JV with Godrej and its failure: P&G gaining access to Godrejs distribution channels and promoting their Camay soap in India due to which Cinthol Soap of Godrej suffered. Godrej never had a say in the JV. Thus, the JV failed 6) Mergers and Acquisitions: a) Gillette: P&G acquired Gillette in 2005. It was after this acquisition that it became the largest FMCG company, pushing Unilever into second place b) This merger added Duracell and Oral-B also to their stable 6) Controversies: a) Price fixing controversy (2011): In April 2011, P&G was fined 211.2m euros by the European Commission for price fixing cartel in Europe along with Unilever, who received a fine of 104m euro, and Henkel. Though the fine was set higher at first, it was discounted by 10% after P&G and Unilever admitted running the cartel. As the provider of the tip-off leading to investigations, Henkel was not fined. 7) P&G has no manufacturing unit in India. The following are the countries where P&G has its manufacturing units: US, Canada, Mexico, Latin America, Europe, China, Africa, Australia 8) P&G also produced radio soaps and TV serials. As of now, The Young and The Restless is the only TV serial partially sponsored by P&G

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IT SECTOR

INTRODUCTION
Say no to Bangalore, Yes to Buffalo Barack Obama This statement used as a last resort by Barack Obama to save the ailing economy, shows the extent to which Indian IT industry is influencing the global climate. Poised to be a $225 billion industry by 2020, the IT industry has not only fuelled economic growth, but also improved the life of people by increasing employment and standards of living. According to NASSCOM, it played a major role in changing the countrys image from a slow moving bureaucratic organization to a land of innovative entrepreneurs and a global providing world class technology solutions and business services. Not only is this sector inviting huge Foreign Direct Investment (FDI), but also, Indian companies have started looking for opportunities abroad.

HISTORY
IT sector can be said to be born with the birth of TCS (then known as Tata Computer Centre) in 1968. Hereafter, with the policies of Jawaharlal Nehru, and the launch of IIT- Kharagpur, we were able to build a large base of skilled engineers. In the mid 1970s FERA caused multinationals like IBM to exit India and the employees were left scrambling for jobs, thus the trend of looking for jobs abroad, mainly in the US started. In 1984, the Rajiv Gandhi government brought in the New Computer Policy, reducing the import rates and thereby inviting foreign companies to come in, and thus India became of supplier of programs and not of programmers.

Evolution:
1991: India faced with economic crisis decides to introduce major reforms. Software Technology Parks of India scheme introduced to promote software exports. To the extent that 90% of software exports in 2008-09 were made by STPI registered units. 1993: IT industry targets are determined: $50 billion by 2008 1994: Telecom liberalized which caused birth of the Internet revolution in India. 1995: TCS recognizes how to solve the Y2K problem 1999: Y2K contracts pile to India 2000: reforms in foreign ownership rules, intellectual property protection and venture capital policy 2002: Indian companies expand hiring, major layoffs registered in US. TCS becomes the countrys largest exporter.

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2003: Led by services conglomerates TCS, Infosys and Wipro, India becomes primary destination for offshore outsourcing as companies seek to lower costs. 2005: SEZ act launched to provide an internationally competitive environment for exports. SEZs are specifically demarked duty-free enclave and shall deemed to be foreign territory (out of Customs jurisdiction) for the purpose of trade operations and duties and tariffs. It provided drastic simplification of procedures and a single window clearance policy on matters of the government. 2008: Subprime crisis in the US affects the order volumes and causes major layoffs in the IT sector. 2009: Satyam Collapsed after the chairman Ramalinga Raju admitted to falsification of accounts to the extent of 1.5 Billion US dollars and violating the insider trading norms. 2011: EU (22-26% of IT revenues) sovereign debt crisis is expected to cause problems to the Indian IT majors because of lower sale cycles. But still IT majors are growing in the region.

CURRENT STATE:
This sector has improved its contribution to Indias GDP from 4.1 per cent in 2004-05 to 6.1 per cent in 2009-10 and an estimated 6.4 per cent in 2010-11. The overall Indian IT-ITeS revenue has grown to US $ 63.7 billion in 2009-10 and an estimated US $ 76.1 billion in 201011, translating into a CAGR of 22.5 per cent from 2004-05 to 2010-11. The industry grew by an estimated 19.5 percent in 2010-11 compared to the moderate growth of 6.2 per cent in 200910. Exports dominate the IT ITeS industry, and constitute about 77 per cent of total industry revenue. Total IT-ITeS exports have grown from US$ 17.7 billion in 2004-05 to US $ 58.9 billion in 2010-11 registering a CAGR of 22.2 per cent from 2004-05 to 2010-11. It now contributes 26% to the exports from India and attracts 8% of the total FDI equity inflows to India. Between April 2000 and February 2011, the computer software and hardware sector received cumulative foreign direct investment (FDI) of US$ 10,705 million, according to the Department of Industrial Policy and Promotion. Nearly one million jobs were created in India during 2010-11, of which 70 per cent were from the IT and BPO sectors, according to data released by the Ministry of Labour and Employment the IT workforce is expected to touch 300 million by 2020. Analysts expect the top IT firms to grow between 23-27 per cent in the FY2012 on the back of more number of discretionary projects, improved pricing, and robust business volumes.

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Major Segments
The major segments in the IT industry are: IT services: This includes E-business solutions, Business intelligence and data warehousing, QA/Testing, Application Development & maintenance, migration and re-engineering, enterprise portals and content management. Business Process Outsourcing: It is a subset of outsourcing that involves the contracting of the
operations and responsibilities of specific business functions (or processes) to a third-party

service provider. BPO is typically categorized into back office outsourcing - which includes internal business functions and front office outsourcing - which includes customerrelated services Engineering Services: Some services that TCS provides in this area are new product development, product lifecycle management, plant solutions. Software products: Software products form the fastest growing segment of the global IT industry, with the software spends forecast to grow from USD 294 billion in FY 2008 to USD 537 billion in 2015. Over the same period, the addressable market for Indian software product businesses is estimated to reach USD 290 to 315 billion.

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IT exports growth in the decade

Year/ Item
IT Service ITeS-BPO Software Products, Engineering Services Total IT-ITeS

200 102
5.8 1.5 0.3

2002 - 03
5.5 2.5 1.5

2003 - 04
7.3 3.1 2.5

200 405
10. 0 4.6 3.1

2005 - 06
13.3 6.3 4.0

2006 - 07
17.8 8.4 4.9

200708
23.1 10.9 6.4

200809
26.5 12.7 7.1

CAG R
23.2 39.2 48.5

7.6

9.5

12.9

17. 7

23.6

31.1

40.4

46.3

28.6

IT-ITeS Revenue and Exports (US $ billion)

Year Total IT-BPO sevices Revenue Exports Domestic, of which (i) IT services (ii) ITes-BPO (iii) Software Products 2009-2010 63.7 2010-2011 (estimated) 76.1 Growth Rate 19.5 CAGR 22.5 Contribution 100%

49.7 14.0 8.9 2.2 2.9

58.9 17.2 10.9 2.8 3.5

18.5 22.8 22.5 27.3 20.7

22.2 23.7 20.8 29.3 30.7

78% 21.9% 13.97% 3.4% 4.55%

Industry Verticals in IT and ITeS Sector

Manufacturing Retail 17% 8% I Tech and Telecom 20% Healthcare Airline and 3% transportation 3%

construction and utilities 3% Media Publishing and Entertainment 2% Others 3%

Other 8%

BFSI 41%

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INDUSTRY DRIVERS
Since IT is a booming industry it is getting a lot of importance from the government and initiatives such as NASSCOM, tax protection in form of SEZs and STPI , growth in cloud computing technologies are all driving the growth of the sector. Taxation: Clarification of taxation norms on packaged software and establishment of dispute resolution mechanism for transfer pricing, reduction in the tax on revenues from foreign subsidiaries of the Indian companies will fuel the growth. The government has also accepted the request to differentiate the cutoff date for developers and units for purposes of grandfathering of SEZ benefits post implementation of the Direct Tax Code. So, the dates for developers are now coincident with the date of launch of Direct Tax code ie 31 st March 2012, but those of units have been extended to 1st March 2014. Withholding tax on Software services, exemption for services wholly consumed in SEZs, Removal of Fringe Benefit Tax on Employee Stock Options, bringing about clarity in regard to refund of Service Tax issues will also help the industry grow. Issue of Employment Visas for skilled foreign workers: Initially the Government accepted that there was a need to treat skilled and highly skilled workers in the IT-BPO sector on a different platform and introduced a monetary threshold of salary to determine such foreign workers. However, subsequently, this very same threshold was extended to all other sectors of the industry in respect of skilled and highly skilled workers. This would attract highly skilled employees to India. Growing number of educational institutes such as IITs, NITs and IIITs and other engineering institutes increase our skilled manpower dramatically. KPO as a growth area: Knowledge Process outsourcing is one of the major subsectors where tremendous growth can be observed. Some of the services such as data analytics, content management, research and information services, animation, biotech and pharmaceutical research, medical and health services are already outsourced to India. Global spend on BPO activities is expected to grow at about 12% till 2012, which will further drive the growth of BPO sector in domestic context. Global growth in IT services spending: The global IT spending is expected to grow ar 6.3% in the next two to three years. India is also poised to increase its share to tap into the global IT spending.

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As US faces downgrading and EU faces sovereign debt crisis the market there is shrinking, whereas other markets such as APAC and BRIC will show a high growth in the coming years and can be a very good potential market. High GDP Growth Rate and Human Resource and Skill Requirement will fuel growth in domestic spending. Other initiatives of the government such as UID project(Aadhar) and egovernace will also increase domestic spending. Sustaining Cost Competitiveness: according to management consultancy AT Kearney's 2011 Global Services Location Index (GSLI) India occupies the top position as the most preferred BPO destination. Challenges: Foreign Exchange Risk : This is one of the risk that is much higher than the market risk. The foreign exchange fluctuations hamper the margins as they were hampered the last year. Now once again the dollar is back on rs. 45.87 per dollar. Country Risk: Risk is coming from the protectionist attitude of the US & Europe (which account for close to 60% and 30% of IT exports respectively) governments. This will hamper the prospects of the IT industries as their operations may get hampered due to this. Variations in global demand growth would present itself as a significant risk factor as the industry is predominantly export driven. Revenues from the BFSI segment are exposed to high risk as evidenced by the recent economic crisis. Ending of tax breaks for STPI by 2010 could result in reduced PAT levels. The union Budget 2011 did not extend the period of tax exemption for STPIs beyond 31st March 2011. This will reduce the willingness of IT cos to come in STPI scheme. Availability of quality human resource, and ability to innovate would present themselves as risks. According to IMaCS report on Human resource and Skill requirements in the IT ITeS Industry for NSDC, the skill gap is very high at all levels in a typical IT organization. It envisages an optimistic growth of 15.7% CAGR and a likely human resource requirement in the IT and ITES sector as 5.3 million persons till 2022., which can be fulfilled by developing its talent pool by expanding in tier II and tier III cities. Other countries such as Brazil, China, Philippines, Vietnam, Czech Republic, Ireland, and Malaysia could eat into Indias pie.

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In addition, data theft and information security present themselves as serious reputation risks for companies in the industry. Additionally, the industry is also prone to regulatory risks as a result of the need for outsourcing service providers to comply with various regulations such as Gramm-Leach-Bliley Act (GLBA), Data Protection Act of the UK, and Sarbanes-Oxley Act. Trends: Shift towards markets other than US and EU: As US and EU markets are experiencing a slowdown, Many Indian companies have started looking for opportunities elsewhere. IBM signed a 10 year deal with Airtel to provide IT services to the latters employee in Africa. Latin American nations have expressed interest in close ties with Indian IT companies have indicated Bilateral Trade Pacts and Free Trade Agreements. Foreign workforce: Not only are we looking at foreign markets for clients, but also for highly skilled employees. Infosys has gone global in terms of workforce. To avoid th e biggest
bottleneck to the growth of a corporation, that is, the availability of good talent, they are looking for employees from all over the world.

Cloud: Cloud computing is a technique by which you can access all your documents and applications via the internet. This means that a database system, connected by the internet to your organization can be used to access all the information that you need. This reduces the cost dramatically as only one license needs to be brought for each application, and also payper-use is applicable. This is a recent trend that is catching up in the IT industry and promises to have a great future. ERP: Enterprise Resource planning has been in the industry for quite some time and companies like SAP, Oracle, PeopleSoft are the major players in this field and help integrate any business together. Global Delivery Model: A global Delivery Model is followed by any company aspiring to be a face in the international IT market. This understands the needs of the customers more effectively than one-size-fits-all approach. Green IT: is an approach to try to make the industry more sustainable

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Industry Capacity: The sector produced approximately 70% of the total 100 million jobs created in India in 201011 and generated revenue of about $76.1 billion. According to NSDC, rising technology spending, GDP growth, emerging markets like BRIC, APAC, Japan etc. will be the primary drivers of growth and that the outsourceable market would expand from the current US $ 500 billion to about US $ 1.5 to 1.6 trillion by 2020. The growth observed in the sector is so high that Nasscom and IMaCs expect the revenue to grow to $281 Billion by 2022.

Future outlook
IT sectors contribution to Indias GDP, Currently at 7% is expected to grow till 2022. As enunciated by NASSCOMs Perspective 2020, the success story of the industry would rely on the following: Catalysing growth beyond todays core markets Establishing India as a trusted global hub for professional services Harnessing ICT (Information and Communication Technology) for inclusive growth Developing a high caliber talent pool Building a pre-eminent innovation hub in India. Growth will be observed in Tier II and Tier III cities as costs of production in Tier I cities increase, but this requires more government spending on development of infrastructure to promote the growth of this industry in these regions.

1 Future IT Hubs, Source: STPI and Tramell Crow

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In the spotlight
Cognizant to acquire CoreLogic India Operations for $50 million cash, adjustment in working

capital and other charges to be decided at closing. July 2011 Infosys and Tata group ahead of Google, Facebook in thought leadership, according to UK based consulting firm- June 2011 Wikileaks cable offers new insights on Oracle-Sun deal Cisco acquires Microsoft Office collaboration company Versly Steve Jobs quits as Apple CEO Steve Ballmer expects stupendous growth in cloud computing in India, to raise $3bn by 2015 and generate 300,000 jobs in India Cognizant overtakes Wipro to be the third largest IT company in India Wipro writes its first Rural BPO Infosys: Prof. Marti G. Subrahmanyam, Lead Independent Director, will retire from the Board effective August 23, 2011

Major players in the IT industry

The top 10 IT companies in India are:

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From more recent figures the top four spots, of companies on basis of revenue , are occupied by: Tata Consultancy, Infosys, Cognizant and Wipro

COMPANY PROFILES TCS

Tata Consultancy Services started as Tata Computer Centre, for the company Tata Group in the year 1968, became the largest IT organization in India since 2001, and has remained at the top position since then. It is an IT services, consulting and business solutions organization and offers a consulting-led, integrated portfolio of IT, BPO, infrastructure, engineering and assurance services through its unique Global Network Delivery Model, which is recognized as the benchmark of excellence in software development. The Company generated consolidated revenues of US $ 8.2 billion for year ended 31 March, 2011 and is listed on the NSE and BSE.
Services:

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Services IT Services IT Infrastructure Services Enterprise Solutions Consulting BPO

Offerings Custom application development, application management, System integration and testing, etc data center management and application management services. SCM, CRM, ERP software, and RFID cloud advisory services, information risk management, IT process and service management Banking and financial services, CIM, Finance and accounting, Human Resource outsourcing, and knowledge process outsourcing. enterprise data management, knowledge and enterprise content management.

Business Intelligence and performance management

Financials: Q1 performance
Particulars Revenues Net Income (PAT) Operating profits Increase in workforce in Q1 Increase in clients Operating Margin EPS BSE (as on 31 Aug 2011) Public share holding
st

Value $2.41 billion $532 million $631 million 11,988(gross), 3,576 (net) 24

Growth 34.4% Yoy 30.6% Yoy 28% yoy 6.0%, 1.8%

26.1% 12.32 INR, $0.27 1040.6 25.93%

On July 14th 2011, TCS declared a dividend of 3 INR per share.

Cognizant
Cognizant Technology Solutions (Cognizant) is a multinational provider of IT services headquartered in Teaneck, New Jersey, USA. The company is a member of NASDAQ-100, the S&P 500 and Fortune 500. Cognizant has been named to the 2010 Fortune 100 FastestGrowing Companies List for the eighth consecutive year.

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What started as an IT development and maintenance services arm of The Dun & Bradstreet Corporation, at Chennai, in 1994, spun off as an independent organization two years later and moved its headquarters to the US. It is now in excellent financial health, reporting over $2.2 billion in cash and short term investments for the quarter ending June 30, 2011. It is hiring extensively in the US, but still more than 75% of its 100,000-plus employees are based in India.
Services Business consulting Application services IT infrastructure services BPO Offerings Strategic services, customer solutions, data warehousing, business intelligence, testing, advanced solutions. application development, testing, application value management consulting and professional services, managed services, integrated solutions. finance and accounting, procurement, research and analytics

Financial Health:
Particulars Revenues Net Income (PAT) Operating Income Increase in clients Operating Margin EPS NASDAQ (as on 31 Aug 2011) Employee additions Cash Reserves
st

Value $1.48 bn $208 mn $269.96 mn 59 18.2% $0.68 $63.45 7100 (Q2) $2.27 bn

Growth 34.38% Yoy 17% Yoy 28% yoy

-0.4% 16%

Wipro
Wipro limited, standing for Western India Palm Refined Oils, is a global IT services company and is the fourth largest software company in India. It was established in 1980 as a subsidiary of Wipro Limited listed on NYSE by Azim Premji. The company has two major diversifications, Wipro Infotech and Wipro BPO.

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Services Consulting Analytics and information management

Description

Business Application Services

Business analytics, business intelligence, performance management, information management Enterprise applications, business collaboration and customer experience, enterprise integration, enterprise security solutions, testing Enterprise BPO, Domestic BPO Development of process, products Application and enterprise systems integration, data centres, disaster recovery Green IT, Cloud, Technical support

Infrastructure Management Services BPO Product and Engineering Services Integration Specialised Services

Microsoft
Founded in 1975, Microsoft having headquarters at Raymond, Washington, US is the worldwide leader in software, services and solutions. It offers a wide range of products and services mainly related to computing. Standard and Poor's and Moody's have both given a AAA rating to Microsoft, whose assets were valued at $41 billion as compared to only $8.5 billion in unsecured debt. Consequently, in February 2011 Microsoft released a corporate bond amounting to $2.25 billion with relatively low borrowing rates compared to government bonds. For the first time in 20 years Apple Inc. surpassed Microsoft in Q1 2011 quarterly profits and revenues due to a slowdown in PC sales and continuing huge losses in Microsoft's Online Services Division (which contains its search engine Bing). (Q1 2011 lost $726 mn, $2.5 bn FY2010). Microsoft recently acquired Skype for $8.5 bn. Microsoft offers a variety of products from Windows, Office suite,IE etc to Xbox for gaming and windows mobile for telephony, to CRM and ERP softwares for business.

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Financial Health:
Particulars Revenues Net Income (PAT) Operating Income Operating Margin EPS NASDAQ (as on 31 Aug 2011)
st

Value $69.94 bn (17.37 Q4 2011) $23.15 bn $26.99 bn 18.2% $2.73 $26.60

Growth 11.9% Yoy 21% Yoy 12% yoy -0.4% 28%

Recommended Reading
http://www.nasscom.in/ http://www.nasscom.in/upload/47143/IT_Mid_Caps_The_Untold_Story.pdf http://www.mit.gov.in/content/industry-promotion-activities-dpl-industyactivities http://en.wikipedia.org/wiki/Cloud_computing http://en.wikipedia.org/wiki/Virtualization http://dl.dropbox.com/u/5973996/Users/Simantik/UNCTAD.pdf http://www.nsdcindia.org/pdf/IT-ITES-Industry.pdf

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RETAIL SECTOR

INTRODUCTION
The Indian retail industry is divided into organised and unorganised sectors. Organised retailing refers to trading activities undertaken by licensed retailers, that is those who are registered for sales tax, income tax etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low cost retailing, for eg. , the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors etc. The Indian retail sector is highly fragmented with 97 percent of its business being run by the unorganised retailers like the traditional family run stores and corner stores. The organised retail however is at a very nascent stage. The sector is the largest source of employment after agriculture and has deep penetration in rural India generating more than 10% of Indias GDP. India is the third-most attractive retail market for global retailers among the 30 largest emerging markets, according to US consulting group AT Kearneys report published in June 2010. Indian retail sector accounts for 22 per cent of the country's gross domestic product (GDP) and contributes to 8 per cent of the total employment. The top five companies in retail hold a combined market share of less than 2%. More than 80% of the retail sector in the country is concentrated in the large cities.

History
Traditionally retailing in India can be traced to the emergence of the neighbourhood Kirana stores catering to the convenience of the consumers. Then we had the era of government support for rural retail: Indigenous franchise model of store chains run by Khadi & Village Industries Commission. The1980s experienced slow change as India began to open up economy. The textiles sector with companies like Bombay Dyeing, Raymond's, S Kumar's and Grasim first saw the emergence of retail chains. Later Titan successfully created an organized retailing concept and established a series of showrooms for its premium watches. The latter half of the 1990s saw a fresh wave of entrants with a shift from Manufactures to Pure Retailers. For e.g. Food World, Subhiksha and Nilgiris in food and FMCG; Planet M and Music World in music; Crossword and Fountainhead in books. Post 1995 onwards saw an emergence of shopping centers mainly in urban areas, with facilities like car parking targeted to provide a complete destination experience for all segments of society. Then there was emergence of hyper and super markets trying to provide customer with 3 Vs - Value, Variety and Volume. There was also the expanding target consumer segment: The Sachet revolution - example of

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reaching to the bottom of the pyramid. At year end of 2000 the size of the Indian organized retail industry is estimated at Rs. 13,000 crore.

Growth/evolution
Indian retail is expected to grow 25 per cent annually. Modern retail in India could be worth US$ 175-200 billion by 2016. The Food Retail Industry in India dominates the shopping basket. The Mobile phone Retail Industry in India is already a US$ 16.7 billion business, growing at over 20 per cent per year. The future of the India Retail Industry looks promising with the growing of the market, with the government policies becoming more favourable and the emerging technologies facilitating operations.

Major event/landmark
One major event which can be stated here is the introduction of FDI of upto 51% in single brand retail sector in India.

Current state
Despite of being one of the hot sectors in India, retail is highly fragmented and organized retail is just 3% of the total retail market. There are about 12 million retail outlets spread across India, earning it the epithet of a nation of shopkeepers. More than 80% of these 12 million outlets are run by small family businesses which use only household labour.

Micro/Macro environment
The following is the Porters five force analysis of the Indian Retail Industry.

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Rivalry among competitors

Limited number of competing firms in organized retail Similar size of players High growth rate International players looking to foray India FDI policy not favourable for international players Domestic conglomerates looking to start retail chains Large number of suppliers Product differentiation is not high Suppliers like Godrej and HLL are willing to integrate forward. Propensity to pay is low. Consumers are price sensitive. Rising income level enables large number of buyers. Unorganized retail.

Threat of entrants

Bargaining power of suppliers

Bargaining Power of buyers Threat of substitutes

Overview of Drivers and Constraints of Growth

Growth drivers Constraints Demand Side Economic Growth Diverse customers segment to cater and Favourable Demographics changing buying behaviour. Urbanization of Tier II and Tier III cities Supply Side Credit availability High real estate cost Lack of human resources Inefficient logistics Space availability Lack of proper infrastructure

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Major segments/sub-sectors
Unorganised sector Unorganised retailing, on the other hand, refers to the traditional formats of low cost retailing, for eg the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors etc. Organised sector Retailing format in India: Malls The largest form of organized retailing today. Located mainly in metro cities, in proximity to urban outskirts. Ranges from 60,000 sq ft to 7,00,000 sq ft and above. They lend an ideal shopping experience with an amalgamation of product, service and entertainment, all under a common roof. Examples include Shoppers Stop, Pyramid, and Pantaloon. Specialty Stores: Discount Stores As the name suggests, discount stores or factory outlets, offer discounts on the MRP through selling in bulk reaching economies of scale or excess stock left over at the season. The product category can range from a variety of perishable/ non-perishable goods. Department Stores Large stores ranging from 20000-50000 sq. ft, catering to a variety of consumer needs. Further classified into localized departments such as clothing, toys, home, groceries, etc. Departmental stores are expected to take over the apparel business from exclusive brand showrooms. Among these, the biggest success is K Raheja's Shoppers Stop, which started in Mumbai and now has more than seven large stores (over 30,000 sq. ft) across India and even has its own in store brand for clothes called Stop. Hypermarts/Supermarkets Large self-service outlets, catering to varied shopper needs are termed as Supermarkets. These are located in or near residential high streets. These stores today contribute to 30% of all food & grocery organized retail sales. Super Markets can further be classified in to mini supermarkets typically 1,000 sq ft to 2,000 sq ft and large supermarkets ranging from of 3,500 sq ft to 5,000 sq ft. having a strong focus on food & grocery and personal sales.

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Convenience Stores These are relatively small stores 400-2,000 sq. feet located near residential areas. They stock a limited range of high-turnover convenience products and are usually open for extended periods during the day, seven days a week. Prices are slightly higher due to the convenience premium MBO Multi Brand outlets, also known as Category Killers, offer several brands across a single product category. These usually do well in busy market places and Metros.

Major 3 players
The major players are Future Group, Shoppers Stop, Reliance Retail. Industry Capacity
Size of Retail Size Estimated size of retail in India Share of Organized retail (%) in India Size of organized retail in India 2004 (Rs. Bn) 9300 3 280 2010 (Rs. Bn) 14000 10-12 1400-1500

Trends:
The ever evolving formats: In most emerging retail markets, such as Eastern Europe, Latin America and China, hypermarkets have been the major high growth format. Supermarkets dominate most cities, but there has been a clear shift towards hypermarkets, driven by the combination of good prices, overall shopping convenience and experience, product range and quality. In India, most hypermarkets are located within city limits as consumers do their shopping more than once a week. This is primarily because Indian consumers prefer fresh produce, have low car penetration and limited refrigeration space at home. Hence, there are only about 25 hypermarkets in India, operated by 4 major retailers. The 3 big retailers (Big Bazaar of Future Group, Star Bazaar of the Tatas and RPG Spencer) out of Indias top 5 retailers, already have aggressive hypermarket strategies in place. This is going to be one of the most preferred formats for international retailers entering India.

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Intense competition will see new innovation in the future. For e.g. The Future Group has started a new formats called Central which they are projecting as destination stores for entire family. These stores are mammoth in size (in excess of 1,00,000 sq.ft.) and by next year they are planning to have Kolkata central with size of 4,80,000 sq ft. The innovation in formats is not limited to food & grocery or apparels but there are several. Changing Format Preference Retailer RPG Piramals Future Group Original Format Supermarket Departmental stores Departmental stores Later Format Hypermarket, Specialty stores Discount stores Hypermarket Supermarket Central Supermarket (TBA) Hypermarket (TBA)

Raheja Group

Tata Group

Departmental stores (Shoppers Stop) Specialty stores( Crossword) Departmental stores (Westside)

Hypermarket (StarIndia bazaar)

Rural India is witnessing different experiments. ITC is experimenting with retailing through its e-Choupal and Choupal Sagar rural hypermarkets. HLL is using its Project Shakti initiative leveraging women self-help groups to explore the rural market. Mahamaza is leveraging technology and network marketing concepts to act as an aggregator and serve the rural markets. A common theme that emerges is the need for business model innovation to tap rural retail potential. Big players which usually act as anchor store owners in a mall are tying up with the developers of the malls to attract crowd by providing special facilities. Mall management is a new field which is attracting attention of developers. Also new business models like the revenue shared business model (where revenue is shared between retailer and mall developer) are on rise. It could be said that new formats will keep on evolving as competition stiffens and international players arrive in India. However, because of huge geography and varying demographics multiple formats will survive.

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E-tailing Another concept which is slowly but surely gaining popularity is e-tailing or electronic retailing which provides the consumers the convenience of online shopping. Almost all the big players in the sector either have or are planning to come up with the online version of the shopping. A case in point is Lgezbuy.com portal launched by LG electronics. Although price may be higher in this form of retailing but it gives the consumer convenience and benefits related to online shopping. Such a format is very popular in developed countries like USA. Movement towards Tier-II and Tier III cities With the increase in consumer spending in Tier II cities and urbanization of Tier III cities, these cities are now attracting lot of retail activities. Players are moving to Tier II and Tier III cities to gain the first mover advantage. Also, the operational cost at these cities is comparatively low than the metro cities primarily because of high real-estate cost in the metro cities. A survey by CRISIL shows that top 60 cities will see the major organized retailing activity. Use of Private Labels A key strategy adopted globally and increasingly in India by retailers is the use of private labels or store brands. Globally private labels contribute to 17 percent of retail sales and are growing at 5 percent per annum. Private labels provide a higher margin to the retailers while simultaneously offering lower prices to consumers. A recent survey by AC Nielsen has identified that 56 percent of their survey respondents in India consider private labels to be good alternatives to manufacturer brands. In India, private label penetration is on the rise. The rapid growth of Indian retailers in the coming years will provide the necessary scale for many to launch an active private label program. In areas like consumer durables, the rapid development of original design manufacturers would facilitate easy introduction of private labels soon. Specialty retailing Learning from western countries, players are trying to capture the market share by bringing out formats catering to single verticals. Such chains are called specialty retailers or category killers. in the West. Many specialized stores have been set up with various food, apparel and footwear brands (both Indian and foreign) and companies like Godrej have already started furniture stores. Hindustan Lever Ltd, the FMCG major, is considering a retail chain for laundry products. Big players such as the Dubai-based Jumbo Group, Tatas and some small players are

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entering the electronics space. Other categories being explored by retailers are office products, toys, lingerie, chocolates, electrical products, paper products, stationery and furnishings. As these stores do not require much space, they will be set up as stores in malls rather than as standalone stores.

Pricing power/price competition

As the retail industry is in the nascent stage it is unlikely that players will play the price war, which usually takes place in a mature industry. The players will however try to win the customers by product differentiation or by providing a unique shopping experience. Only basic daily usage high frequency- low value items would be sold at lower prices and once the market gets saturated price war may be witnessed in the other product categories also.

Competitive & Financial Analysis

Net Profit Sales Net Revenue Retail space added/ No. of new stores opened 2011 2.26 million square feet 11 stores 90 stores

Pantaloon Retail Shoppers Stop Reliance Retail

2010 Rs. 179.56 crore Rs. 9.29 crore N/A

2011 Rs. 76.67 crore Net loss (1.52 crore) Net loss (350 crore)

2010 Rs. 5934.37 crore N/A

2011 Rs. 4097.43 crore N/A

2010 Rs. 9,786.94 crore Rs. 355.27 crore N/A

2011 Rs. 12,211.7 9 crore Rs. 593.31 crore N/A

N/A

N/A

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Net profit of Pantaloon Retail India declined 57.30% to Rs. 76.67 crore in the year ended June 2011 as against Rs. 179.56 crore during the previous year ended June 2010. Sales declined 30.95% to Rs. 4097.43 crore in the year ended June 2011 as against Rs. 5934.37 crore during the previous year ended June 2010. In the consolidated full year results, the company reported net profit after minority interest of Rs. 141.54 crore in the year ended June 2011 as against Rs. 67.49 crore during the previous year ended June 2010. Sales reported to Rs. 12211.79 crore in the year ended June 2011 as against Rs. 9786.94 crore during the previous year ended June 2010 while other income totaled Rs.154.55 crore, compared with Rs.126.06 crore in 2010. The company reported fiscal year Core Retail consolidated net profit, before minority interest, of Rs.190 crore, compared with Rs.230 crore last year--a 17 percent decline. Total revenue, including other income, was Rs.11,033 crore, up by 22 percent from the Rs.9,012 crore in 2010. On a per shares basis, earnings for the year was Rs.6.36, up by 103 percent from the Rs.3.13 a year-ago. For FY11, same-store Sales Growth (SSG) under Value Retailing was ten percent, Lifestyle Retailing stood at 16 percent and Home Retailing at eight percent. The company added 2.26 million square feet of retail space during the year. The board of Pantaloon Retail (India) has recommended dividend at the rate of Re 0.90 per equity share (45%) and at the rate of Re 1 (50%) per Class B shares (Series 1). Department store operator Shoppers Stop swung to a consolidated net loss of Rs 1.52 crore in the first quarter of 2011, compared with a net profit of Rs 9.29 crore in the year ago quarter due to a sharp rise in total expenses. Its consolidated total income for the April-June quarter was up 67% year-on-year to Rs 593.31 crore. During the first quarter, the companys consolidated expenses soared 75% from a year ago to Rs 592.74 crore. During the three-month period, its expenses towards purchase of traded goods jumped 92% from a year ago to Rs 429.07 crore, and employee costs were up 89% to Rs 46.95 crore. Its interest and finance costs also rose to Rs 8 crore from Rs 4.91 crore in April-June. On a standalone basis, Shoppers Stops first quarter net profit was up 16.6% year -on-year to Rs 11.7 crore and total income was up 144% to Rs 393.02 crore.

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What lies ahead

Growth outlook The Indian retail industry has grown at a Compounded Annual Growth Rate (CAGR) of 13.3% for the period FY06-10. The growth in the Indian economy since the last decade and the change in consumption pattern of the Indian populace in terms of higher proportion of middle class population, greater proportion of working women etc can unarguably be linked to the growth of the Indian retailing industry. Of all the segments in retail, the contribution of food & grocery remained the highest at 58% of the total retail sales during FY10, with the clothing & footwear segment remaining the second largest contributor occupying 10% of the total retail pie during the same period. However in terms of growth figures, the entertainment, books & sports goods equipment segment outperformed the other retail segments registering a CAGR of 22.5% during the period FY06-10. In spite of the growth, the industry remains largely fragmented with the organized retailing still at a nascent stage. In case of overall retailing revenues, the food & grocery segment accounted for the highest share at 58% of the total retailing pie aggregating Rs.11.49 lakh crore during FY10. In the organised retailing, the food & grocery segment stood as the second largest contributor with revenues aggregating Rs.24,273 crore during the same period. However, the organised retail penetration of other segments such as clothing & footwear, entertainment & books and furniture & furnishing surpassed that of the food & grocery segment. The Indian retail industry has witnessed rampant growth over the last decade. However, during the economic recession since the latter half of FY09, the retailers especially in the organised segment suffered a set-back in the form of declining revenues and halt in their capex plans. The unemployment situation, further aggravating the fear of job losses during the recession, resulted in muted consumer spending with the consumers choosing to spend on necessities rather than discretionary items; the industry thus witnessed decline in footfalls, conversion rate, which was especially apparent in the decline of same store sales. The slowdown in consumer spending led to the inventory being stacked up resulting in a low inventory turnaround ratio, registering a decline to 4.3 times during FY09 from 4.8 times during FY08. Before the onset of recession, the large scale expansion plans of the Indian retailers warranted an increase in inventory and greater store operating expenses in the form of rentals and staff expenses thus increasing the working capital requirement. However with the economic

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recession in effect, the retailers were faced with a liquidity crunch owing to difficulties in raising funds both from the equity as well as debt markets. Additionally, the funds raised during the economic boom attracted higher interest rates thereby affecting the retailers ability to service the interest as well as principal repayments during the downturn. The total interest outgo of the retailers as tracked by CARE Research registered a y-o-y growth of 78.6% during FY09. Even though, post recession, the industry is witnessing a gradual turnaround, it is met by a few stumbling blocks that constitute the challenges ahead for the Indian retail industry viz. higher store rentals as compared to retailers globally, taxation & other policy regulations, inefficiencies in supply chain management and higher rate of shrinkage. In spite of the said challenges, CARE Research expects the Indian retail industry to grow on the backdrop of expectant rise in the countrys Gross Domestic Product (GDP) during the period FY11-FY13. The rise in income level of the Indian populace, in turn, is expected to fuel the domestic consumption ultimately resulting in higher revenues for the Indian retailers. Importantly, CARE Research expects the penetration of organised retail in the total retail pie to increase by FY13 owing to the expanding reach of the retailers to tier-II & III cities accompanied by higher consumer spend on discretionary items. Also, in an attempt to increase margins, CARE Research expects the retailers would restore to adapting measures such as increasing the share of private labels in the total store sales, reducing store level operating expenses etc. The report on the Indian retail industry provides a comprehensive overview of all the above mentioned parameters with detailed forecasts.

Opportunities in the retail sector

AT Kearneys study on global retailing trends found that India is the least competitive as well as least saturated of all global major markets. This implies that there are significantly low entry barriers for players trying to setup base in India, in terms of the competitive landscape. The report further stated that global retailers such as Walmart, Carrefour, Tesco and Casino would take advantage of the more favourable FDI rules that are likely in India and enter the country through partnerships with local retailers. Other retailers such as Marks and Spencer and the Benetton Group, who operate through a franchisee model, would most likely switch to a hybrid ownership structure. A good talent pool, unlimited opportunities, huge markets and availability of quality raw materials at cheaper costs is expected to make India overtake the worlds best retail economies by 2042, according to industry players.

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The retail industry in India, according to experts, will be a major employment generator in the future. Currently, the market share of organised retail is just over 4% of the total retail industry, thereby leaving a huge untapped opportunity. The sector is expected to see an investment of over $30 billion within the next 4-5 years, catapulting modern retail in the country to $175-200 billion by 2016, according to Technopak estimates. On the total organised retail market of Rs. 550 billion, the business of fashion accounts for Rs. 300.80 billion, which translates to nearly 55% of the organised retail segment in the country. Total fashion sector was estimated at Rs. 1,914 billion and forms about 15% of the countrys retail market of Rs. 12000 billion. Commanding such a large chunk of the organised retail business in India, fashion retailing has indeed been responsible for singlehandedly driving the business of retail in India.

Challenges in retailing
The industry is facing a severe shortage of talented professionals, especially at the middle management level. Most Indian retail players are under serious pressure to make their supply chains more efficient in order to deliver the levels of quality and service that consumers are demanding. Long intermediation chains would increase the costs by 15%. Lack of adequate infrastructure with respect to roads, electricity, cold chains and ports has further led to the impediment of a pan-India network of suppliers. Due to these constraints, retail chains have to resort to multiple vendors for their requirements, thereby raising costs and prices. The available talent pool does not back retail sector as the sector has only recently emerged from its nascent phase. Further, retailing is yet to become a preferred career option for most of Indias educated class. The system is currently plagued with differential tax rates for various states leading to increased costs and complexities in establishing an effective distribution network. Stringent labour laws govern the number of hours worked and minimum wages to be paid leading to limited flexibility of operations and employment of part time employees. Further, multiple clearances are required by the same company for opening new outlets adding to the costs incurred and time taken to expand presence in the country.

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The retail sector does not have an industry status yet making it difficult for retailers to raise finance from banks to fund their expansion plans. Government restrictions on the FDI are leading to an absence of foreign players resulting into limited exposure to best practices. Nonavailability of government land and zonal restrictions has made it difficult to find a good real estate in terms of location and size. Also lack of clear ownership titles and high stamp duty has resulted in disorganised nature of transactions.

Future outlook
Tough times lie ahead for the retail industry as consumers are holding on to their wallets due to job losses, stock markets are volatile and chances of a prolonged recession are increasing. Consumer spending is likely to contract further as banks are becoming overcautious in lending and are also tightening their rules on the credit card issues. Thus the retailers are witnessing an uphill task in terms of wooing consumers, despite offering big discounts. Also the organised retailers have been facing a difficult time to wean away customers from traditional kirana stores, especially in the food and grocery segment. The organised retail segment has to adopt various best practices to prevail in the current situation. They have to offer more convenience in terms of superior logistics and pricing or location. Moreover, inadequacies in the existing retail infrastructure and logistics is also denting the sectors growth. An efficient retail supply chain is very critical for the retailers, particularly for agri commodities. Baring few leading big retail companies, the supply chain is not very efficient for most of the small and medium retailers. Retailers can therefore enhance their earnings by improving their supply chain with appropriate expertise. They therefore need to increase their investments in retail ancillaries and retail logistics to restrict the fall in margins. Moreover, many retailers are negotiating for better credit terms, boosting their supply chain, cutting inventories. Besides, few of them are even merging their stores to counter the current slowdown in retail sales. Furthermore, in the liquidity crunch scenario, retail companies have been expanding their brands with minimum investments through the franchise route, which has received a major thrust in the economic downturn scenario. The franchise model constitutes 25-30% of the current organised retail pie, and is expected to reach 45-50% in the next couple of years. In view of the changing economic landscape, the retailers are increasingly adopting measures to boost their top line as well as their bottom line by streamlining their existing supply chain, especially in terms of inventory control and cost control, and are also raising the share of private labels in the total revenue map. Globally, private labels constitute around 17% of total

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sales and in India private labels constitute 10-12% of the organised sectors revenue20. Henceforth, the Indian retail companies will be looking at increasing the share of private labels from the current rate to 20-40%. Private labels can act as the saving grace for many retail companies since margins in this range between 30-40%. Consumer sentiments will be in a recuperating stage in the current year. As retail companies have not achieved the expected sales till now, inventory is likely to pile up and to get rid of this; companies are expected to slash prices by mark down in merchandise. For instance, in the fashion and accessories category, the product cycle is very short and retailers are expected to provide deep discounts to consumers to clear the inventory pile-up. Real estate experienced huge reduction in costs in the third quarter of FY08 and to capitalise this opportunity, they started expanding their stores to viable locations. The companies are closing down their under-performing stores and are moving to viable areas to curtail losses. The real estate costs are expected to rise in the coming quarters due to expansion and relocation plans of retail companies. Despite the setbacks experienced this year, the retail sector is likely to flourish in the coming years.

Company profiles
1. Future Group Future Group, led by its founder and Group CEO, Mr. Kishore Biyani, operates some of Indias most popular retail formats that include Pantaloons, Big Bazaar, Central, Home Town, Ezone and Food Bazaar. While retail forms the core business activity of Future Group, the group has developed significant presence in consumer finance, capital, insurance, brand development, retail media and logistics. The groups retail formats bring in around 250 million customer footfalls every year and provide a platform for over 30,000 small, medium and large entrepreneurs in India to sell their products and services to these customers. The group has a retail presence in 85 cities and 65 rural destinations and employs over 35,000 people directly. The groups flagship enterprise, Pantaloon Retail India Limited was founded in 1987 and is listed in the Bombay Stock Exchange and National Stock Exchange since 1991. The company along with its subsidiaries operates around 16,000,000 square feet (1,500,000 m 2) of retail space in the country. Over the years, the group has also developed successful partnerships

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with Indian and foreign companies. It also operates rural retail chain in partnership with Godrej Group. The group also has exclusive brand license partnerships with leading global brands like Lee Cooper, Converse, Callaway, Prince, Spalding and Wilson. Future Group believes in developing strong insights on Indian consumers and building businesses based on Indian ideas, as espoused in the groups core value of Indianness. The groups corporate credo is, Rewrite rules, Retain values. Awards and recognition Brands Readers Digest Awards 2006 Platinum Trusted Brand Award - Big Bazaar. The Readers Digest awards are based on surveys done among consumers by independent research agency, Nielsen Media Research. CNBC Awaaz Consumer Awards 2006 Most Preferred Large Food & Grocery Supermarket Big Bazaar conducted in association with AC Nielsen-ORG Marg across 21 major cities, nearly 10,000 consumers were asked to choose their most preferred brands. Digital Best Indian Website In The Shopping Category - Futurebazaar.com. PC World, a leading consumer technology magazine selected the best Indian websites in various categories based on use of technology for delivering solutions, information being presented in an intuitive and concise manner and overall experience aided by design. People Resources Hewitt Best Employers 2007 Best Employers in India (Rank 14th) Pantaloon Retail (India) Ltd. Leading human resources consultancy, Hewitt Associates conducts an annual survey of the best employers in India, as part of its global initiative. It is based on CEO interview, People Practices Inventory and Employee Opinion Surveys. Pantaloon Retail became the only retailer to feature among the twenty-five best employers in India. 2. Shoppers Stop Shoppers Stop Limited was founded by K Raheja Corp in 1991 laying the foundation of the modern retail industry in India. It started operations with the first store in suburban Mumbai

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and is now a multi-channel retailer with 43 large format department stores and online presence. From its inception, Shoppers Stop has progressed to become a premier Fashion & Lifestyle destination for the family. Today, Shoppers Stop is known for its superior quality products, services and above all, for providing a complete shopping experience. With an immense amount of expertise and credibility, Shoppers Stop has become the highest benchmark for the Indian retail industry. In fact, the companys continuing expansion plans aim to help Shoppers Stop meet the challenges of the retail industry in an even better manner than it does today. Shoppers Stop invested in and acquired the Crossword Bookstores which now operates more than 65 stores across the country. It has also invested in HyperCITY, a hypermarket chain which has been rated as amongst the top 100 stores worldwide. With exclusive brands as well as domestic and international brands, Shoppers Stop continues its expansion across the country with the department stores, bookstores and hypermarkets. Shoppers Stop also operates specialty stores for expectant mothers and children in arrangement with Mothercare PLC, and cosmetic boutique stores with MAC. A JV with The Nuance Group of Zurich operates airport retail stores. Specialties Retail, Hypermarkets, Department Stores, Bookstore, Airport retailing 3. Reliance Retail Reliance Retail Limited operates retail outlets in India. Its retail outlets offer foods, groceries, apparel and footwear, lifestyle and home improvement products, electronic goods, and farm implements and inputs. The companys outlets also provide vegetables, fruits, and flowers. It focuses on consumer goods, consumer durables, travel services, energy, entertainment and leisure, and health and well-being products, as well as educational products and services. The company was formerly known as Reliance Petroleum Retail Private Limited and changed its name to Reliance Retail Limited in January 2006. The company was incorporated in 1998 and is based in Mumbai, India. Reliance Retail Limited operates as a subsidiary of Reliance Industries Ltd. It has many subsidiaries under it such as Many brands like Reliance Fresh, Reliance Footprint, Reliance Time Out, Reliance Digital, Reliance Wellness, Reliance Trendz, Reliance Autozone, Reliance Super, Reliance Mart, Reliance iStore, Reliance Home Kitchens, and Reliance Jewel come under the Reliance Retail brand. Reliance Retail, the wholly-owned

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subsidiary of Mukesh Ambanis Reliance Industries, is all set to open 150 stores by March-end and double the number of stores across the country in all formats within five years. This will result in a 10-fold increase in revenue for the chain, from Rs 4,500 crore in 2009-10. In 2010-11, the retail chain would have opened 350 stores, 150 in the last quarter of the current financial year. At present Reliance Retail has 1,050 stores in all formats across the country. As for 2011-12, the plan was to open another 400. According to the company, the thrust of the expansion drive will be on the value format in the states of eastern India, along with Uttar Pradesh, where penetration has been relatively low. At present, of the 20 odd format stores, both food and non-food, half of Reliance Retails revenues come from the food arm.

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