Aluminium Sector Analysis Report

The most commercially mined aluminium ore is bauxite, as it has the highest

content of the base metal. The primary aluminium production process consists of three stages. First is mining of bauxite, followed by refining of bauxite to alumina and finally smelting of alumina to aluminium. India has the fifth largest bauxite reserves with deposits of about 3 bn tonnes or 5% of world deposits. India's share in world aluminium capacity rests at about 3%. Production of 1 tonne of aluminium requires 2 tonnes of alumina while production of 1 tonne of alumina requires 2 to 3 tonnes of bauxite.

The aluminium production process can be categorised into upstream and

downstream activities. The upstream process involves mining and refining while the downstream process involves smelting and casting & fabricating. Downstream-fabricated products consist of rods, sheets, extrusions and foils.

Power is amongst the largest cost component in manufacturing of aluminium,

as the production involves electrolysis. Consequently, manufacturers are located near cheap and abundant sources of electricity such as hydroelectric power plants. Alternatively, they could set up captive power plants, which is the pattern in India. Indian manufacturers are the lowest cost producers of the base metal due to access to captive power, cheap labour and proximity to abundant supply of raw material, i.e., bauxite.

The Indian aluminium sector is characterised by large integrated players like

Hindalco and National Aluminium Company (Nalco). The other producers of primary aluminium include Indian Aluminium (Indal), now merged with Hindalco, and Sterlite Industries.

The per capita consumption of aluminium in India continues to remain

abysmally low at1.2 kg as against nearly 15 to 18 kgs in the western world and 10 kgs in China. This offers significant upside potential. The key consumer industries in India are power, transportation, consumer durables, packaging and construction. Of this, power is the biggest consumer (about 48% of total) followed by infrastructure (20%) and transportation (about 10% to 15%). However, internationally, the pattern of consumption is in favour of transportation, primarily due to large-scale aluminium consumption by the aviation space.

The metal has a long working life due to its propensity for recycling. Recycled

metal requires significantly less amounts of energy for manufacturing of primary aluminium. Just to put things in perspective, the recycling of aluminium scrap requires 5% of the energy required for primary smelting, which is astoundingly lower, considering that power is such a high cost component.

Key Points
Supply Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, domestic production comfortably meets domestic requirements.

Demand

Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low per capita consumption in India. Also, demand for the metal is expected to pick up as the scenario improves for user industries, like power, infrastructure and transportation. Large economies of scale. Consequently, high capital costs. Most domestic players operate integrated plants. Bargaining power is limited in case of power purchase, as Government is the only supplier. However, increasing usage of captive power plants (CPP) will help to rationalise power costs to a certain extent in the long-term. Being a commodity, customers enjoy relatively high bargaining power, as prices are determined on demand and supply.

Barriers to entry Bargaining power of suppliers

Bargaining power of customers

Competition Competition is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatilities witnessed in this industry. TOP

Financial Year '11

In CY 2010, the world aluminium consumption stood at around 41 Million
tonnes (MT), a sharp increase of over 20% over 34 m tonnes consumption in CY 2009. The CY10 production stood marginally higher at 42 m tonnes against production of 38 m tonnes in CY 09. The sharp rise in demand was the result of strong recovery in the emerging market demand and primarily restocking led growth in developed markets. A sharp turnaround in the end user segments such as automobiles, industrial and infrastructure and thrust on power sector growth propelled the aluminium industry growth.

In FY11, LME average aluminium prices remained strong at around USD

$2,250 an increase of over 21% over previous year's average prices. The appreciating rupee though negated some of the LME price gains for domestic aluminium producers as the prices are dollar denominated. The prices continued to rise even as inventory levels remained at their historic highs. This was the result of tightness in the physical market, with most inventories tied up at various warehouses under financing deals.

Across the globe, the cost of production of aluminium increased sharply as

input costs such as alumina and power surged. TOP

Prospects
In CY11, the global aluminium demand is expected to remain strong and is
expected to increase by around 9% reaching to almost 45 m tonnes. The Chinese demand is expected to rise by a healthy 11%. In India, the demand is expected to increase at almost 14% with an improvement in industrial activity and automobile growth. Over the medium term, thrust on power sector spending will spur the aluminium demand.

 Aluminium production is expected to increase in line with the demand. The

market surplus is going to continue for a while. Strong prices have led many smelters to restart their production in last one year.

The greatest challenge facing the industry is the continuous increase in raw

material prices which are showing no signs of going down. Most input costs such as fuel oil, coal tar pitch, and caustic soda have increased along with the freight costs. Alumina costs for non integrated smelters have gone up and may increase further.

Aluminium inventories across the globe are near all time high. But most of

these inventories are reportedly bound in financing deals and are not expected to flood the market. The long term fundamentals are strong and the surplus is expected to reduce significantly in the near future. TOP

Related Links for Aluminium Sector: Quarterly Results N E W | Sector Quote | Structure | Inputs | Products | Over The Years

Auto Ancillaries Sector Analysis Report

The fortunes of the auto ancillary sector are closely linked to those of the auto
sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. Out of the total revenues, engine parts account for 31% of the total revenues of the industry in FY10.

ACMA, the Indian auto component industry body had around 588 players
registered with it in FY10.

Margins in the replacement market are higher than the OEM market. The OEM
market is very competitive and component manufacturers have to compromise on margins to bag bulk orders. Moreover, delivery schedules and quality standards have to be adhered to very strictly.

Indian auto ancillary sector has traditionally suffered from poor quality. While

this still holds true for the unorganized sector, the organized sector has been resorting to increased automation to reduce the defect levels.

Lower labour costs give Indian auto ancillary companies an absolute cost

advantage. To put things in perspective, ACMA numbers suggest that wage cost accounts for 3% to 15% of revenues for Indian manufacturers as compared to 20% to 40% for US players. India's strength in exports lies in forgings, castings and plastics historically. But this is changing with more component manufactures investing in upgradation of technology in recent years.

Key Points
Supply Low for high technology products. Unorganized sector dominates the domestic component market due to excise benefits. Generally, excess supply persists. Linked to automobile demand. Export demand is linked to the increasing acceptance towards outsourcing. Capital, technology, OEM relationships, customer service, distribution network to meet replacement demand. Low with OEMs. Relatively high in the replacement market

Demand

Barriers to entry Bargaining power of suppliers Bargaining power of customers

Companies operating in the export market face competition at a global level. At the domestic level, market structure is fragmented for a large number of ancillary products. Most companies adopt low cost and differentiation strategies. In

some products (like batteries), only two or three companies control over 80% of the market. Competition Will intensify, as global players will enter the market leading to consolidation. Dereservation of SSI will result in access to capital and technology. TOP

Financial Year '11

After a strong FY10, the Indian automobile industry mirrored this strong
performance in FY11 too. Consequently, the passenger car and CV segment witnessed a growth of 30% and 27% respectively for the full year.

In light of this strong surge in growth, auto component industry managed to do

well during the year as Bharat Forge and Exide reported 59% YoY and 21% YoY growth in sales respectively. Despite subdued economic conditions in the developed world, some players were able to put up a strong show in exports as well. For instance, Bharat Forge saw its exports grow by a stupendous 73% YoY on account of new customer additions and product development. Capacity utilisation rates of the auto ancillary sector were also high in light of strong growth in the domestic market.

Just like the auto industry, the auto ancillary industry witnesses a rise in input
costs during the year. This was in sharp contrast to the scenario in FY10 whereby input costs had softened considerably. As a consequence, rising input costs exerted pressure on margins and those who were able to keep other cost heads under control were able to maintain margins if not expand them.

TOP

Prospects
There has been a conscious effort by manufacturers to improve productivity of
the suppliers in the past few years. Though the number of active vendors has declined significantly for auto manufacturers, technology transfer and fresh fund infusions have resulted in improved productivity in the remaining ones. Relaxation of FDI norms for the small-scale sector could emerge as one of the key growth drivers in the long run. The Indian automotive components industry has lined up sizeable investment schedules for the next few years.

The automobile sector is cyclical and dependent on the growth of the

economy and improvement in infrastructure. Factors like increased public spending, favorable interest rates and general improvement in per capita income point towards higher demand for automobiles in the future. Also, government's initiatives in the infrastructure sector such as the Golden Quadrilateral project and NHDP (National Highway Development Programme) are likely to give boost to four-wheeler sales especially CVs. Just to put things in perspective, we expect CV segment to grow by 7% to 8%, 2-wheeler demand to increase by around 12% to 15% and passenger car sales growth at 10% to 12% over the medium to long term. This is a positive for auto ancillary manufacturers.

In the long term, the growth of this sector will depend partly on pace of

indigenization levels across all segments. The prospects look bright as most companies are increasing the indigenous components, in an effort to reduce their currency losses and remain competitive. Also, the fact that auto

manufacturers like Ford, Hyundai and Maruti are exporting cars, make the prospects look encouraging.

Margins are likely to come under pressure in the long term because as

competition increases, manufacturers will find it difficult to increase prices and will try to cut costs. The burden will eventually fall on auto ancillary players. In the near future though, companies will need to have manufacturing lines that can be adapted for new models, have strong technology backing, an ability to export to developed markets, market dominance in specific products and a growth plan driven by volumes and product innovations. Companies will have to focus on quality and abide by delivery schedules if they want to survive. As manufacturers sourcing components are keen to get components from fewer sources in future, this will lead to consolidation in the sector.

The growing number of Free and Preferential trade agreements being signed

by India with countries like Thailand, Singapore and other ASEAN countries will hurt the cost competitiveness of Indian companies as Indian players play significantly higher duties than their Asian counterparts. Therefore, Indian companies might lose out on big orders if the duty structure is not rationalized.

Automobiles Sector Analysis Report

6
[Key Points | Financial Year '11 | Prospects | Sector Do's and Dont's]

The Indian automobile segment can be divided into several segments viz. twowheelers (motorcycles, geared and ungeared scooters and mopeds), three wheelers, commercial vehicles (light, medium and heavy), passenger cars, utility vehicles (UVs) and tractors.

Demand is linked to economic growth and rise in income levels. Per capita

penetration at around nine cars per thousand people is among the lowest in the world (including other developing economies like Pakistan in segments like cars).

While the industry is highly capital intensive in nature in case of four-wheelers,

capital intensity is a lot less for two-wheelers. Though three-wheelers and tractors have low barriers to entry in terms of technology, four wheelers is technology intensive. Costs involved in branding, distribution network and spare parts availability increase entry barriers. With the Indian market moving towards complying with global standards, capital expenditure will rise to take into account future safety regulations.

As compared to their global counterparts, both the two-wheeler as well as four

wheeler segments are relatively lesser fragmented. However, things are changing, especially on the passenger cars front as many foreign majors are eyeing the Indian market. As a result, pricing power is likely to diminish going forward.

Automobile majors increase profitability by selling more units. As number of

units sold increases, average cost of selling an incremental unit comes down. This is because the industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.

Key Points
Supply The Indian automobile market has some amount of excess capacity. Demand Largely cyclical in nature and dependent upon economic growth and per capita income. Seasonality is also a vital factor. Barriers to entry High capital costs, technology, distribution network, and availability of auto components. Bargaining power of Low, due to stiff competition. suppliers Bargaining power of Very high, due to availability of options. customers Competition High. Expected to increase even further.. TOP

Financial Year '11

A total of 11.8 m two-wheelers were sold in India in FY11, a growth of a strong
26% over the previous year. Motorcycles accounted for 76% of the total two wheelers sold. The growth came in despite the series of interest rate hikes undertaken by the RBI to bring inflation under control. The scooters (geared & ungeared) improved their sales considerably, largely due to improved performance of the ungeared scooter segment. The 3-wheeler segment also performed well as domestic volumes improved 19% YoY, led by 22% growth in passenger carriers.

The medium and heavy commercial vehicles (M/HCVs) segment saw its

volumes grow by a huge 32% after having grown by an impressive 34% in FY10 as well. LCVs on the other hand, underperformed their HCV peers as volumes increased at a relatively lower rate of 23%. The strong growth in the overall CV segment was due to high growth rates during the first half of the fiscal supported by sustained economic growth and impact of a lower base in the corresponding period last year. Healthy growth in the agricultural and industrial sectors also fuelled demand for CVs.

The tractor industry, the worlds largest also logged in good growth in FY11.

Domestic volumes grew by 20% as against a growth of 32% in the previous year. After increasing by 26% in FY10, sales of passenger cars did well in FY11 as well as volumes grew by 30% YoY. A strong growth in GDP aided by recovery in agriculture and good performance in the industry and services sector had a positive impact on the same of passenger vehicles as well. Utility Vehicles also logged in a strong growth of 19% in FY11.

While raw material prices softened considerably in FY10 and bolstered

operating margins, the scenario reversed in FY11. Although sales growth in FY11 remained strong, auto companies began to feel the pressure on operating margins on the back of rising raw material prices. TOP

Prospects
The government spending on infrastructure in roads and airports and higher
GDP growth in the future will benefit the auto sector in general. We expect a slew of launches in the Segment 'B' and Segment 'C' of passenger cars. Utility vehicle segment is expected to grow at around 8% to 9% in the long-term.

In the 2-wheeler segment, motorcycles are expected to witness a flurry of new

model launches. Though the market size is expected to grow by 10% to 12%, competitive pressure could keep prices and margins under control. TVS, Honda and Hero Motocorp are poised to benefit from higher demand for ungeared scooters in the urban and rural markets.

Riding the wave of structural changes taking place in the country, the tractor
industry registered good growth in FY10 as well as FY11. However, while fiscal FY09 saw volumes grow marginally, the same roared back in FY10, witnessing a growth of 32%. The strong performance continued in FY11 as well as volumes grew by 20%. While good monsoon is a positive for the sector, given the fact that non-farm incomes have continued to climb up, volumes should still hold up pretty well despite a year or two of poor monsoons. The longer-term picture is impressive in light of poor mechanisation levels in the countrys farm sector and the thrust of the

government on improving rural infrastructure.

With an estimated 40% of CVs plying on the roads being 10 years old,

demand for HCVs is expected to grow by 7% to 8% over the long term. While the industry is going through cyclical hiccups currently, we expect this factor to weaken in the future on account of strong structural tailwinds. The privatisation of select state transport undertakings bodes well for the bus segment.

Banking Sector Analysis Report

The global financial system is still far away from a full recovery on account of a

slowdown in the US economy as well as the Euro debt crisis. However, the Indian banking sector has been relatively well shielded by the central bank and has managed to sail through most of the crisis with relative ease. But, with the economic buoyancy the world over showing signs of cooling off, the investment cycle has been wavering in the country.

Public sector banks have been proactive in their restructuring initiatives be it in

technology implementation or pruning their loss assets. While the likes of SBI have made already attempts towards consolidation, others are keen to take off in that direction. Incremental provisioning made for asset slippages have safeguarded the banks from witnessing a sudden impact on their bottomlines.

Retail lending (especially mortgage financing) that formed a significant portion

of the portfolio for most banks in the last two years lost some weightage on the banks' portfolios due to their risk weightage. However, on the liabilities side, with better penetration in the semi urban and rural areas, banks garnered a higher proportion of low cost deposits thereby economising on the cost of funds. However, the RBI recently deregulated the savings account deposit rate. However only a few smaller private sector banks have increased their rates while the others have maintained status quo.

Apart from streamlining their processes through technology initiatives such as

ATMs, telephone banking, online banking and web based products, banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income. They are also looking at various financial inclusion initiatives in order to spread the use of financial services among India's large unbanked population.

Key Points
Supply Demand Liquidity is controlled by the Reserve Bank of India (RBI). India is a growing economy and demand for credit is high though it could be cyclical.

Barriers to entry Licensing requirement, investment in technology and branch network, capital requirements. Bargaining power of suppliers Bargaining power of customers Competition High during periods of tight liquidity. Trade unions in public sector banks can be anti reforms. Depositors may invest elsewhere if interest rates fall. For good creditworthy borrowers bargaining power is high due to the availability of large number of banks. High- There are public sector banks, private sector and foreign banks along with non banking finance companies competing in similar business segments. Plus the RBI is

planning to issue a few new banking licenses. TOP

Financial Year '11

Banks managed to better their FY10 performance in FY11, growing above the
RBI's 20% estimate for credit growth for the year. Non-food bank credit grew by 20.6% during 2010-11 as compared with 16.8% per cent during 2009-10. Credit growth remained high in the first half of FY11 on account of increased demand from industry and the service sector. Personal loans grew significantly by 17% during 2010-11 as compared with 4.1% during the previous year. Almost all the components except for credit card receivables exhibited high growth. Growth slowed down in the beginning of 2011 on account of the RBI's aggressive interest rate policy. In order to fight stubborn inflation, which still remains above comfort levels, the central bank hiked its key policy rates eleven times since March 2010 in an aggressive rollback of its monetary stimuli undertaken earlier. The repo rate currently stands at 8%, with the reverse repo rate at 7%.

Growth on the deposit front however remained relatively lower coming in at

around 17% YoY in FY11. However liquidity remained tight during the year, only seeing some easing towards the end of the year.

Data source: RBI

In the retail portfolio, while home loans grew by 15% YoY, while vehicle loans

grew by 24%. Personal loans enjoyed a much smaller growth of 17% YoY due to bank's reluctance towards uncollateralized credit. Credit card outstanding in fact dropped by 10% YoY.

Indian banks, however, enjoyed higher levels of money supply, credit and
deposits as a percentage of GDP in FY11 as compared to that in FY10 showing improved maturity in the financial sector.

Data source: RBI

Most private sector banks had a good outing in FY11. Increased pricing power
helped Indian banks grow their net interest margins. Most entities chose to reasonably grow their franchise as well as assets substantially during the year on account of increased credit demand and overall buoyancy in the Indian market.

Migration to the system based recognition non-performing assets (NPAs)

caused a sharp uptick in NPAs for PSU banks. Plus, pension and gratuity provisions for their large employee base caused a huge dent in the profits of most PSU banks in the country. TOP

Prospects
With banks having complied with Basel II and having sufficient capital in their
books; it will be a challenge to deploy the same safely and profitably in the event of persistence of economic slowdown. While, the government was able to re-capitalize a few PSU banks in FY11, some of them especially SBI still need to shore up their capital base.

In order to step up agricultural credit the target for bank credit has been

increased by Rs 1 trillion to Rs 4.8 trillion for FY12. Banks have been asked to increase focus on credit lending to small and marginal farmers. Plus, under the financial inclusion target, banking facilities will be provided to all 73,000 habitations having a population of over 2,000 during FY12.

New banking licenses are expected to be issued by the RBI to private sector
players. However, these licenses will only be awarded to certain players meeting strict requirements on the capital, exposures, and corporate governance front. Lots of players including NBFCs, industrial houses, microfinance companies etc are all vying for this coveted license.

However, growth is still a concern for the banking sector in FY12 on account

of a slowdown in the economy as well as reduced demand for credit on account of the current high interest rate environment. Asset quality concerns are also an issue especially in the infrastructure, power and real estate space. TOP

Beverages, Food & Tobacco Sector Analysis Report

India is the largest producer of milk and second largest producer of fruits and
vegetables. A huge coastline and a large livestock population have ensured it self-sufficiency in marine, meat and poultry products. Indian food market is valued at USD 182 bn whereas value of the food processing industry is USD 70 bn. The food processing industry grew at a compounded annual growth rate of 9% during 2004-10.

The food processing industry encompasses dairy products, fruits & vegetables,

meat & poultry, fisheries, packaged foods and beverages. In most segments of the industry, the processing/value addition is a paltry 8%. The industry is characterized by the huge presence of small scale and the unorganized sector forming 70% share by volume and 50% share by value. The scope of growth can be further gauged from the fact that the share of the Indian processed food in GDP stands at a mere 9%. Countries such as Brazil, China and Thailand have more than 20% of their GDP being contributed by processed food.

Cigarettes account for only 15% of the total quantity of tobacco produced in

the country whereas in the rest of the world, 90% of the tobacco produced is consumed in the form of cigarettes. The bulk 85% of the domestic tobacco produced is consumed in the form of chewing tobacco (gutka, khaini and zarda) and bidis.

The cigarette industry is subject to disproportionate and high taxation.

Resultantly, cigarettes account for a mere 15% share in overall consumption but contribute more than 75% of taxes raised from the tobacco sector. Excise duty constitutes more than 50% of the cost of a cigarette.

Key Points
Supply Abundant supply of processed foods. Packaged products such as tea, coffee and snack food are largely available in the unorganized market. Tobacco segment enjoys high penetration even in rural areas. Supply is higher because of bidis that are manufactured by the unorganized sector. Processed food demand is growing at 10%-15% per annum. Rising contribution of women to the working force and growing nuclear families has led to higher demand for convenience foods, especially in urban areas. Tobacco demand is largely inelastic. Demand growth is pegged at 4%-6% for cigarettes. Huge investments in promoting brands and setting up distribution networks. Punitive taxation policies of government in case of tobacco. Suppliers being small and fragmented have limited bargaining power. Only some companies like ITC source their agri-inputs internally thereby reducing their dependence on suppliers. Most tobacco companies have integrated backwards and have

Demand

Barriers to entry

Bargaining power of suppliers

their own supply chains. Therefore, the bargaining power of suppliers is not high. Bargaining power of customers In packaged foods, the bargaining power of customers is restricted to the mass or the lower end of the price segment which is highly competitive. As tobacco consumption is more or less a habit, the bargaining power of consumers is only to the extent of choice of the brand. Segments such as biscuits, noodles and snack foods are highly competitive. In a bid to capture market share, companies offer discounts and freebies. Recently inflationary environment has led to increased demand for private label brands that are available at a discount. In case of tobacco, branded cigarettes, bidis and contraband compete with each other. TOP

Competition

Financial Year '11

The processed food industry continued to witness robust sales growth in FY11
led by higher volumes. A number of companies effected modest price-hikes to counter food inflation that soared to double-digits during the year. Backed by improved product mix and cost rationalization, a majority of the companies succeeded in maintaining or improving operating margins during the year. The cigarette industry was impacted by a 17% increase in excise duty and hike in VAT rates by state governments.

Growing health awareness has spurred demand for nutritious and healthy

foods which led to a slew of product offerings from Britannia (healthy breakfast cereals and biscuits), Marico (Saffola oats) and GSK Consumer (Foodles). Even ready-to-eat segments witnessed a number of launches in FY11. TOP

Future Prospects:
The food industry is expected to grow to $ 300 bn with the market size of
processed foods reaching $ 150 bn by 2015 (Technopak). Demand drivers such as urbanization, increase in the number of nuclear families and working women, higher disposable income and the changing consumption pattern are likely to boost demand for processed foods. Higher penetration of organized retail from the current 5% to 30% of FMCG sales by 2020 will aid the growth. A number of categories which are highly dependent on organized retail-like frozen food products - are expected to witness significant growth in future.

A large chunk of the Indian consumer is low on the value chain. Awareness is
high for all basic food items, which form part of the staple diet whereas it is low in the case of snacks and culinary products. The segments, which are dominated by the unorganised sector, have the potential to grow faster in the years to come.

A large chunk of the Indian consumer is low on the value chain mainly in

snacks and culinary products. These segments, which are dominated by the unorganized sector, have the potential to grow faster in the years to come.

The FMCG sector is witnessing large-scale ad spends and improving distribution network. New and existing players like Heinz, Marico, Conagra, Pepsi, ITC, Dabur, Britannia, Danone, Kraft and Amul are expanding their product folio in the domestic market. At the same time, Indian food brands such as Bikanervale Foods, MTR's ready-to-eat foods and ITC's Kitchens of India are making their presence in the overseas markets.

Presence of numerous segments has diversified the processed food offerings.

For instance, Dabur deals in beverages and culinary products, HUL offers beverages, staples, dairy and snack foods, Britannia is present in bakery products, ITC is present in staples and snack foods & Nestle has dairy, beverages and snack foods in its product basket. Regional players like Haldiram and MTR are focused on traditional snack and food mixes.

The growth in the tobacco industry has been impacted by high taxation and

burgeoning illegal trade that accounts for 16% of the total industry size. Higher duties result in price hikes affecting volume growth of domestic companies due to competition from the contraband and bidi segments. Rationalization of taxes is likely to provide a level playing field to the industry.

The Indian government has approved funds for establishing 15 mega food

parks across the country. The Union budget 2011-12 has increased allocation by $ 45 m to $ 135 m to the Food Processing Ministry. The government of India had also announced Vision 2015, which lays focus on enhancing the competitiveness of food processing industry in both domestic as well as international markets. The Vision 2015 provides for enhancing the level of processing of perishable to 20%, enhancing value addition to 35% and increasing the share in global food trade from 1.5% to 3%, by 2015.

Cement Sector Analysis Report

The Indian cement industry is the 2nd largest market after China. It had a total
capacity of about 300 m tonnes (MT) as of financial year ended 2010-11. Consolidation has taken place with the top three players alone controlling almost 35% of the capacity. However, the balance capacity still remains quite fragmented.

Despite the fact that the Indian cement industry has grown at a commendable

rate in the last decade, registering a growth of nearly 9% to 10%, the per capita consumption still remains substantially poor when compared with the world average. While China registered the highest per capita cement consumption in 2010 of about 1,380 kg, India stood much lower at 230 kg. This underlines the tremendous scope for growth in the Indian cement industry in the long term.

Cement, being a bulk commodity, is a freight intensive industry and

transporting it over long distances can prove to be uneconomical. This has resulted in cement being largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. With capacity addition taking place at a faster rate as compared to demand, prices have remained southbound, especially in the last one year. Nevertheless, considering the governments thrust on infrastructure, long term demand remains intact.

Given the high potential for growth, quite a few foreign transnational

companies have displayed their interest in the Indian markets. Already, while companies like Lafarge, Heidelberg and Italicementi have made a couple of acquisitions, Holcim has increased its stake in domestic companies Ambuja Cements and ACC to gain full control. Considering the long term growth story, fair valuations, fragmented structure of the industry and low gearing, another wave of consolidation would not come as a surprise.

Key Points
Supply The demand-supply situation is high skewed with the latter being significantly higher. Housing sector acts as the principal growth driver for cement. However, recently industrial and infrastructure sectors have also emerged as demand drivers. High capital costs and long gestation periods. Access to limestone reserves (key input) also acts as a significant entry barrier. Licensing of coal and limestone reserves, supply of power from the state grid etc are all controlled by a single entity, which is the government. However, nowadays producers are relying more on captive power, but the shortage of coal and volatile fuel prices remain a concern. Demand

Barriers to entry

Bargaining power of suppliers

Bargaining power of customers

Cement is a commodity business and sales volumes mostly depend upon the distribution reach of the company. However, things are changing and few brands have started commanding a premium on account of better quality perception. Intense competition with players expanding reach and achieving pan India presence. TOP

Competition

Financial Year '11

During financial year 2010-11 (FY11), the cement industry added nearly 28
MT over and above the 60 MT added in the previous year taking the total capacity to nearly 300 MT. However, cement demand during the year grew at a paltry rate of 5.3%, the lowest since 2003-04. A significant slowdown was witnessed following the first quarter of FY11 mainly on account of the several hikes in key lending rates by the Reserve Bank of India aimed at curbing the inflationary pressures. The credit crunch resulting from the monetary tightening impacted real estate, infrastructure and other construction projects. Prolonged monsoons and logistical constraints further dampened the construction work. As a result, average industry capacity utilisation fell as low as 70%. The impact was even worse in the southern region, which witnessed the highest capacity additions.

The low cement demand severely affected average industry realisations

(average price per bag of cement). Additional capacities coming on stream further intensified the oversupply situation. On the cost front, rising input and fuel costs severely hurt the margins of cement players. Export markets also remained sluggish due to the slowdown in the global economy, and particularly the sagging construction activity in the Gulf region. TOP

Prospects
The growth of the Indian economy has slowed down in recent times on
account of the rising inflation, high interest rates, high prices of commodities and fuels. The growth prospects of the cement industry are closely linked to the growth of the overall economy and the real estate and construction sector in particular. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 60-70% of the countrys cement. If the slowdown in real estate persists for an extended period, it would impact the growth in consumption of cement. In such a case, the small and mediumsized cement players would be the worst hit. Despite the overcapacity situation weighing on the cement industry, several major capacity additions are expected in the next few years. Hence, the supply overhang is likely to persist for at least 2-3 years. This will keep a constant pressure on cement realisations. On the demand front, the cement industry is likely to maintain its growth momentum and continue growing at around 8% to 9% in the medium to long term. Government initiatives in the infrastructure sector and the housing sector are likely to be the main growth drivers.

In the Union Budget 2011-12, the government restructured the excise duty on
cement in a way that would effectively increase the tax incidence on the cement industry. However, certain initiatives chalked out to benefit the user industries would in turn boost demand for cement. Custom duties on key

inputs such as petcoke and gypsum were also reduced which would provide some marginal relief against the rising costs of inputs.

Construction Sector Analysis Report

India is on the verge of witnessing a sustained growth in infrastructure build

up. The construction industry has been witness to a strong growth wave powered by large spends on housing, road, ports, water supply and airport development. The construction sector has registered double digit growth during the last few years and its share as a percentage of GDP has increased considerably as compared to the last decade. The Planning Commission of India has proposed an investment of around US$ 1 trillion in the Twelfth fiveyear plan (2012-2017), which is double of that in the Eleventh five-year plan.

From a policy perspective, there has been a growing consensus that a privatepublic partnership is required to remove difficulties concerning the development of infrastructure in the country. During the first two years of the eleventh five-year plan (2007-2012), the share of private players in the total investment was 34%. This is higher than the target of 30% for the eleventh five-year plan. During the twelfth five-year plan, the contribution of private sector in total infrastructure investment is expected to increase to 50%. The balance will be borne by the public sector.

The real estate industry comprising of construction and development of

properties has grown from family based entities with focus on single products and having one market presence into corporate entities with multi-city presence having differentiated products. The industry has witnessed considerable shift from traditional financing methods and limited debt support to an era of structured finance, private equity and public offering.

The construction sector is a major employment driver, being the second

largest employer in the country, next only to agriculture. This is because of the chain of backward and forward linkages that the sector has with other sectors of the economy. About 250 ancillary industries such as cement, steel, brick, timber and building material are dependent on the construction industry. A unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times.

Key Points
Supply Past 4-5 years have seen a substantial increase in the number of contractors and builders, especially in the housing and road construction segment. Demand exceeds supply by a large margin. Demand for quality infrastructure construction is mainly emanating from the housing, transportation and urban development segments.. Low for road and housing construction. However, high working capital requirements can create growth problems

Demand

Barriers to entry

for companies with weak financial muscle. Bargaining power of suppliers Bargaining power of customers Competition Low. Due to the rapid increase in the number of contractors and construction service providers, margins have been stagnant despite strong growth in volumes. Low. The country still lacks adequate infrastructure facilities and citizens have to pay for using public services. Very high across segments like road construction, housing and urban infrastructure development. Relatively less in airport and port development. TOP

Financial Year '11

After a slow growth in the last fiscal, order inflows in the construction industry
registered a healthy growth in FY11. However, it was not reflected in the revenues and profitability due to execution delays and rising cost of construction. Nevertheless, considering the strong order backlog, the next fiscal could be promising provided execution remains on track.

The 2011-12 Budget saw increase in allocation towards various infrastructure

development schemes. The government earmarked Rs 2 trillion for infrastructure development as a whole. This is an increase of 23.3% over 2010-11. The government also increased FII limit for investment in corporate bonds issued in the infrastructure sector to US$ 25 bn from US$ 5 bn. Backed by government's sustained focus on housing, road, port and airport development, infrastructure sector in India is poised to grow.

The first half of FY11 proved favorable for the real estate companies. The

global economy improved, bringing back financial confidence to the home buyers along with low interest rates. As demand for houses mounted, developers increased the prices. Prices went up to pre-2008 levels and in some cases beyond that. However, the situation has changed since 4QFY11. Rising inflation forced the Reserve Bank of India to hike interest rates. High interest rates and high property prices started denting demand for real estate. The real estate companies are reeling under heavy debt and rising costs (both operating expenses and interest costs). Nevertheless, as genuine demand exists for good quality homes, long-term fundamentals for real estate sector remains strong. TOP

Prospects
India is on the verge of witnessing a sustained growth in infrastructure
buildup. Infrastructure investments continue to be the most important growth driver for construction companies. The proposed increase in allocation in the twelfth five-year plan (2012-2017) will translate into a healthy business for construction companies.

Real estate investments account for majority of the total construction

investments. Demand-supply gap for residential housing, favourable demographics, rising affordability levels, availability of financing options as well as fiscal benefits available on availing of home loan are the key drivers supporting the demand for residential construction. According to the Technical

Group on Estimation of Housing Shortage estimates, there would be shortage of 26.53 m houses during the Eleventh Five Year Plan (2007-12), which provides a big investment opportunity. In addition to this, demand for office space from IT/KPO segment is expected to continue due to emergence of India as a preferred outsourcing destination. Also, boom in organized retail is expected to result in huge demand for real estate construction.

While long-term factors are likely to work in favour of the real estate

developers, the outlook for the short term remains bleak. The double whammy of plunging sales and rising costs have taken their toll on the profitability of real estate majors. Also, banks turned cautious towards rescheduling debt or issuing fresh loans to real estate companies, as an aftermath of the bribe-forloan scam. Prices of steel, cement and labor, which together make for almost 75% of overall construction cost, have risen by over 30% since 2009. Upward spiraling cost of construction materials has put great pressure on project execution, in turn leading to project delays. Entry into affordable housing is likely to pressurize margins but would arrest the free fall in topline as witnessed during the downturn.

Consumer Products Sector Analysis Report

Consumer products are also known as Fast Moving Consumer goods (FMCG)
as these are consumed on a daily basis. Consumer products are broadly classified into three categories namely home care products, personal care products and food products. On the basis of price, FMCG goods are divided into three segments- low priced, mid-priced/ mass or popular and high-priced/ premium end. Typically the lower segments of the market drive volumes. The premium segment is less price-sensitive and more brand conscious.

The FMCG sector is valued at Rs 1463 bn or $33 bn (AC Nielsen report). At

present, urban India still accounts for the major share of 66% of total FMCG consumption while rural India accounts for the remaining 34%. However backed by low unit packs & aggressive distribution, the resurgence in rural demand that started two years ago continued in 2010-11.

In urban India, rising disposable income and increased aspirational levels has
led to the phenomenon of value vaulting wherein after a threshold level of penetration, consumers move up the value chain rather than increase consumption. The trend of premiumization has been catalyzed by modern trade format and explosion of new launches and is particularly witnessed in personal-care and convenience food categories. According to Nielsen study, value vaulting has led to middling of the market and blurring of lines between the popular and premium segments.

The industry is volume driven and is characterised by low margins. As the

frequency of consumption is high, consumer products require high brand equity for a strong recall value. The development of brands requires marketing, heavy advertising, slick packaging and strong distribution networks. Also, raw material prices play an important role in determining the pricing of the final product.

Despite the strong presence of MNC players, the unorganised sector has a
significant presence in this industry. In most categories, the unorganised sector is almost as big if not bigger as the organised sector. Unorganised players offer higher margins to stockists in order to gain marketshare. The implementation of Goods & Services Tax is likely to provide a level-playing field to the FMCG companies.

Key Points
Supply: Abundant supply in metros. Distribution networks are being beefed up to penetrate the rural areas. FMCG sector poised to grow to $74 bn by 2018, says Federation of Indian Chamber of Commerce and IndustryTechnopak report. Huge investments in promoting brands, setting up distribution Demand:

Barriers to

entry:

networks and intense competition, but the sector is not capital intensive. Some of the companies are integrated backwards, which reduces the supplier's clout. Manufacturing is largely outsourced. In case of branded products, there is little that the consumer can influence, but intense competition within the FMCG companies results in value for money deals for consumers (e.g. buy one, get one free concept). Private labels which have an advantage of lower marketing expense are offered by retailers at a discount to mainframe brands. These brands are becoming increasingly popular in the current inflationary environment. : Competition is faced from domestic unorganized players, MNCs and also from cheaper imports, which are increasingly visible in urban markets. Price wars are a common phenomenon. Private labels offered by retailers act as competition to undifferentiated and weak brands. TOP

Bargaining power of suppliers: Bargaining power of customers:

Competition:

Financial Year 2010 11

In FY11, the sector continued on a strong growth trajectory with the non-food
and OTC segment of the industry recording a robust growth of 15% (AC Nielsen MAT March 2011). Demand was driven by higher disposable income and evolving consumer lifestyle in urban markets and improving penetration and rising income in rural markets.

The rural markets continued to lead demand in personal care and oral care

products. According to Nielsen's data, rural sales in washing powder, hair oil and shampoo each contributed more than a third of the overall category sales in FY11. Sales growth in rural markets surpassed that in urban markets in more than 50% of the FMCG categories. Nielsen has projected the size of the rural market to grow ten folds to $ 100 bn by 2025.

In FY11, margins of FMCG companies were hit by unprecedented increase in

price of crude and other commodities. As crude price spiralled above $100 a barrel, price of input crude-derivatives, transportation/freight and packaging costs increased sharply. Advertisement and promotional spends remained high on account of heightened competitive activity. The companies effected judicious price increases and also reduced the packet sizes and stockkeeping units (SKUs). Hence the growth seen by FMCG companies was mostly volume led. The reduction in surcharge from 7.5% to 5% and hike in the base MAT kept effective tax rates unchanged during the year.

TOP

Prospects
The FMCG industry has benefitted from rising domestic consumption. Total
consumption expenditure forms a lion's share of 69% of GDP. Growing employment, rising disposable income, a relatively young population (median age of 26 years) and changing consumption pattern have led to higher domestic consumption. The FMCG industry grew at a compounded annual

growth rate of 11% in the past decade.

India is at the cusp of yielding the demographic dividend. As per the

International Labour Organisation, India will have the highest working age population in the world by 2020. As per National Council of Applied Economic Research, the proportion of middle class population will swell from 13.1% at present to 37.2% by 2025-26. Thus higher working-age population and rising middle class will translate into higher purchasing power & boost consumerism.

In the rural markets, deepening penetration and evolution in consumption

pattern will drive demand. As per Associated Chambers of Commerce & Industry, the FMCG sector will witness more than 50% growth in rural and semi-urban segments by 2012. The per-capita expenditure in rural market is half that of the urban market. But at 150 million household, rural India is nearly three times bigger than urban India holding immense potential demand. The FMCG sector is expected to grow at a compounded annual growth rate of 12% and reach market size of $ 74 bn by 2018.

While the homegrown companies are looking to expand overseas, the MNC

subsidiaries are strengthening their domestic base to capitalize on the growing demand. Going forward more MNCs will enter India, as the government is likely to clear 51% FDI in multi-brand retail. Currently organized retail comprises only 5% of FMCG sales with the market dominated by more than 12 m small 'kirana' stores. Strong macroeconomic fundamentals, burgeoning disposable income, robust consumerism, greater rural penetration and growing organized retail will drive future demand in FMCG industry.

Energy Sources Sector Analysis Report

Energy value chain has 2 stages - upstream (exploration and production) and

downstream (refining and marketing). Post extraction from reserves, crude oil is processed to yield various petroleum products, which are then marketed.

The gas consuming sectors can be broadly classified into - Priority (power,

fertilizers) and unregulated sectors (City gas distribution, industrials, refining etc.). The gas demand in India is met through either domestic supplies or imported gas (LNG). As per the Government mandate, the priority sector has the first claim over domestic gas which is less costly than the imported supplies (since it can't pass higher gas costs to the end consumer). Since demand overpowers supplies, the final off take of gas depends on available domestic supplies, regasification capacity and pipeline infrastructure etc.

The share of natural gas in serving India's energy needs is 10% versus 24%

across the world. India has total reserves of 1,201 mmt of crude oil and 1,437 bcm of natural gas at the end of 2010. Around 80% of Oil and 20% of Gas is imported to serve consumption needs.

While Petroleum is deregulated, the prices for diesel, kerosene and LPG are

still fixed. As a result of this, the state run oil retailers incur under recovery losses. As of now, losses on account of under recoveries are shared amongst upstream oil companies, the Government and downstream for which there is no fixed formula.

Key Points
Supply In the upstream segment, supply from the domestic market caters to 20%-25% of the total demand for crude oil and approximately 80% of the gas. In the downstream segment, refining has seen significant capacity addition in the recent past. Lack of logistics support can hamper the large-scale export potential of the products. In the past, we have seen a fair degree of correlation between the growth in petroleum products and the growth in the overall economic activities. Thus demand will be in line with economic growth. In the upstream segment, government permission is required to commence operation. Finding, exploration, development and production cost of oil fields are significant, thus barriers are higher. High for crude, since domestic availability is only about 20%25% of the requirement. For the petroleum products, given the surplus capacity in the country and the commodity nature of

Demand

Barriers to entry

Bargaining power of suppliers

the product, the bargaining power is low. Bargaining power of customers In the upstream segment, government allocates the crude oil produced by the players. Thus, in an indirect way act as a bargaining arm for OMCs.On the retail front, government acts as a strong bargaining arm of customers, with OMCs having to sell the sensitive petroleum products at losses. In the industrial and consumer segment, the competition is moderate and is expected to intensify with the increase in the refining capacity of the country. The Government of India (GoI) has enacted various policies such as new exploration licensing policy [NELP] and coal bed methane [CBM] policy to encourage investments and competition across the industry's value chain. However the dominance of ONGC in the segment will continue for some time to come. In the downstream segment, increased action is expected in product pipelines and city gas distribution. TOP

Competition

Financial Year '11

The Indian basket of crude oil averaged around US$ 85.09 per barrel, up 22%
YoY. Inflation was a major issue on the domestic front. Global oil prices increased due to turmoil in Middle East and North Africa. The domestic crude processing in FY11 stood at 196.5 MMT, up 5.3% YoY. The domestic crude production came at 37.68 MMT, up 12.47% YoY. The natural gas production came at 52.22 BCM, up 9.9% YoY.

Demand for petroleum products in India at 142 million tonnes was up 2.6%

YoY. The crude import volumes at 163.13 MMT were up 2.4% YoY. The total exports of finished products touched 56.35 MMT, up 10% YoY while imports stood at 17 MMT, up 16% YoY. The consumption was up for LPG, Aviation Turbine Fuel (ATF), Naphtha, and High Speed Diesel (HSD) that amounted to 74% of the consumption basket. The consumption for rest of the products like Superior Kerosene Oil (SKO), Bitumen, Lubes, Light Diesel Oil (LDO) and Fuel Oil (FO) etc. declined. The subsidized products (SKO-6%, HSD-42% and LPG-10%), constituted 58% of the total products consumption. The Indian refining capacity increased to 184.1 MMT, up 2.3% YoY.

In FY-11, Asian LNG prices remained linked to crude oil and spot prices in

recent months touched $10-12/MMBTU.The overall gas supply in the country has increased to 154 mmscmd, up 4.8% YoY. FY11 also saw developments on cross border pipeline (TAPI) project.

Natural gas prices were revised to US$ 2.52 per MMBTU for North East

consumers and US$ 4.2 per MMBTU for the rest. Also the non APM price of natural gas produced by national oil companies was revised upwards. TOP

Prospects
The Government has a planned an investment worth US$ 563 bn across the
oil and gas value chain under the Eleventh Plan (2007-201) and is also looking at Open Acreage Licensing Policy (OALP).

The demand supply gap in gas sector is bound to widen further. We expect RIL BP deal to lead to new developments in the upstream sector. We believe it will take some more time before production from KG D6 blocks increases. The declining production from existing oil reserves should offset the increase from new discoveries. In this backdrop and with increasing capex plans, the companies that operate in regasifying LNG should benefit. The gas prices are expected to increase at the end user level. GAIL is implementing five new gas pipelines, which should increase the transmission capacity to around 300 MMSCMD and would also double the length of existing gas pipeline. However, there is a concern of capacity underutilization of pipelines. While gas companies are mulling over entering the power sector, we don't expect any major event there as we doubt gas price pooling will happen soon. It is expected that the Government of India will look at options to minimize the subsidy burden on sale of petroleum products. The deregulation of diesel is also under consideration. If that happens, it will open the market for private players leading to high competition. On GRMs front, if the differential between Brent and Dubai crude remains high, it will lead to better margins for the companies that can process heavier crude. In petrochemicals, huge investments in new capacities in emerging economies like are expected to raise it to the level of a production hub due to availability of cheap feedstock. However, such opportunities are fraught with global threats like slowdown in U.S/Europe and political unrest in the MENA region. Going forward, higher domestic production, regulatory reforms across the value chain and pipeline, refining and gas infrastructure will be the driving factors for the sector.

Engineering Sector Analysis Report

[Key Points | Financial Year '11 | Prospects | Sector Do's and Dont's]

Engineering is a diverse industry with a number of segments. A company from

this sector can be a power equipment manufacturer (like transformers and boilers), execution specialist or a niche player (like providing environment friendly solutions). It can be an electrical, non-electrical machinery and static equipment manufacturer too.

Order book size determines the performance of the company in the short to

medium-term. In order to bag big contracts, companies need to have a big balance sheet size and proven execution capabilities. They need huge working capital in order to execute bigger contracts, as initially they receive only part payment and the remaining comes as projects get executed.

Many tariffs that earlier offered protection to Indian capital goods

manufacturers, have been removed or reduced. This coupled with the high cost of capital in India puts Indian manufacturers at a disadvantage against overseas competition. There have been numerous instances in the recent past where Chinese equipment manufacturers (especially in power generation) have snatched away orders from Indian companies due to the pricing advantage.

Power sector contributes the largest to the engineering companies' revenues.

For instance, as of the latest fiscal year end, ABB and BHEL derive roughly 53% and 79% of their revenues from supplying equipments to the power sector. And with the government planning to add large-scale generation capacities in view of the paucity of power in the country, the potential seems huge for the engineering majors in both generation and the transmission & distribution space.

Infrastructure is another key area of operation for major Indian engineering

companies. L&T's order book at the end of FY11, for example, contained around 36% of orders from the infrastructure sector which includes activities like engineering, design and Engineering of industrial projects and social & physical projects like housing, hospitals, IT parks, expressways, bridges, ports, and water & effluent treatment projects.

Key Points
Supply Abundant supplies available across most segments, except for technology intensive executions. Supply of power generation equipment has seen bottlenecks in the past. Demand growth in this sector is fuelled by expenditure in core sectors such as power, railways, infrastructure development, private sector investments and the speed at which the projects are implemented. The pace of project execution has been lumpy in the year gone by due to delays in execution and

Demand

achieving financial closure on the part of customers. Barriers to entry Barriers to entry are high at upper end of the industry as skilled manpower and technologies, and ability to fund large projects are a prerequisite. Bargaining power of suppliers is low because of intense competition amongst them. However, in technology driven high-end segments, suppliers have the upper hand. Bargaining power for technology driven segments is low.

Bargaining power of suppliers Bargaining power of customers Competition

Majority of the companies compete in terms of pricing, experience in specific field, quality of equipment, capabilities with respect to size of projects that can be handled and timely completion of projects. Nevertheless, competition is getting progressively higher in the industry as companies of all sizes try to move towards scaling up their technology and capacity. TOP

Financial Year '11

The year gone by was disappointing one for the Indian engineering industry.
Order inflows were weak due to delays in awarding projects, land acquisition problems and environmental issues. Even the operating margins came under pressure due to commodity price inflation. Thus, rising commodity prices and slowdown in order inflows proved to be a double whammy for the engineering companies.

RBI's tight monetary policy slowed the industrial capex during the year. And
with inflation reigning high we expect rate tightening to continue for the next few quarters. This on the contrary would further impact the momentum in industrial capex.

TOP

Prospects
The domestic macroeconomic fundamentals continue to remain strong.
However, a situation of overcapacity, especially in the area of transmission and distribution equipment may impact growth momentum of some companies in the short term.

World class infrastructure has emerged as one of the most important

necessities for unleashing high and sustained growth. From a policy perspective there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. The realisation finally seems to be setting in with numerous BOT (build, operate and transfer) projects being awarded to various private sector companies. This makes the future of the Indian engineering sector extremely bright.

The government's initiative to bring clarity to the power sector reforms is a

welcome sign for the industry. Further, with the land acquisition bill being tabled in the parliament recently it can be said that reforms are slowly but gradually seeing the light of the day.

The shift in focus towards reducing T&D losses will increase the order book
size of the companies operating in this realm. With power generation and distribution looking up, power equipment companies can look forward to a promising future.

Also, if the government opens up the defense sector to further participation

from private players, this will make available another avenue for certain large companies in the sector that are looking to get in to this business which holds a large potential.

The next 2-3 quarters would remain a key challenge for the engineering

companies. While execution pace is slowing down due to various internal as well as macro issues, margins have also come under pressure due to rising commodity prices. Thus, unless the macro-environment improves overall growth will continue to remain sluggish in the near term.

Hotels Sector Analysis Report

After witnessing exceptionally bad years in FY09 and FY10 due to the global

economic slowdown and terror attacks, the Indian hotel industry appears to be now on a path of slow recovery. Foreign tourist arrivals (FTAs) to India surged from 5.11 m in 2009 to 5.58 m in 2010, thereby resulting in an increase of 9.3% YoY.

India occupies the sixty-eighth position among the top tourist destinations in

the world, according to the Travel and Tourism Competitiveness Report 2011. To encourage the tourism sector, the government in recent times, has taken some measures which will benefit the sector. In the general budget for 201112, Rs 11.7 bn for development of tourism infrastructure and promotion of tourism was allocated. This figure is higher by Rs 1.0 bn as compared what was allocated in the previous year. The Centre and States are also working out a PPP (Public-Private-Partnership) model to increase hotel capacity.

Government of India increased spend on advertising campaigns (including for

the campaigns 'Incredible India' and 'Athithi Devo Bhava' - Visitors are like God) to reinforce the rich variety of tourism in India. The ministry granted Tourist Visa on Arrival (T-VoA) for the citizens of Finland, Japan, Luxembourg, New Zealand and Singapore. It also promoted India as a safe tourist destination and undertook various measures, such as stepping up vigilance in key cities and at historically important tourist sites. The tourism ministry has envisaged a budgetary allocation of Rs 200 bn in the Twelfth Five Year Plan.

According to the latest Tourism Satellite Accounting (TSA) research, released

by the World Travel and Tourism Council (WTTC), the demand for travel and tourism in India is expected to grow by 8.2 % between 2010 and 2019. This will place India at the third position in the world. India's travel and tourism sector is expected to be the second largest employer in the world. Capital investment in India's travel and tourism sector is expected to grow at 8.8 % between 2010 and 2019. The report forecasts India to get more capital investment in the travel and tourism sector and is projected to become the fifth fastest growing business travel destination from 2010 through 2020.

Over the past few years, the hotel industry has witnessed a shift in the product
mix towards the budget and mid market hotels. Renowned hotel companies have launched brands (eg. Ginger by Indian Hotels (IHCL)) catering to the budget and mid-market customers, who were thus far being served by the unorganized sector.

Key Points
Supply As of January 2011, the total count of hotel rooms in India is 120,000 and the country is expected to require additional 80,000. The shortage is more prominent in budget and mid market segment. This will support improvement in ARRs (Average Room Rates) in this segment for the next few years. Largely depends on business travelers but tourist traffic is also

Demand

on the rise. Demand normally spurts in the peak season between November and March. Barriers to entry Bargaining power of suppliers Bargaining power of customers Competition High capital costs, poor infrastructure facilities and scarcity of land especially in the metros. Limited due to higher competition, especially in the metros.

Higher in metro cities due to increasing room supply.

Intense in metro cities, slowly picking up in secondary cities. Competition has picked up due to the entry of foreign hotel chains. TOP

Financial Year '11

The sector began the year FY11 on a positive note, continuing the trend
witnessed in the second half of FY2010. Led by signs of economic recovery, demand from both foreign and domestic travellers continued to be strong. Rising tourist inflow and higher occupancy kept the hotel companies afloat after the slowdown. The foreign tourist arrivals were higher by 9.3% YoY in 2010. Existing hotel companies, new foreign players and real estate players continued with their expansion plans.

However, ARRs continued to remain subdued during 1HFY11, as new supply

did impact room rentals across India. During 2HFY11, the industry started witnessing some improvements in ARRs, though in single digits, as the supply pressures negated the impact of improvement in demand and prevented any steep increases in room tariffs.

Supply overhang in certain cities, increase in food and fuel costs and rising

interest rates eroded the margins for the Indian hotel industry. The balance sheets of hotel companies remained under stress on account of acquisitions of land banks at unrealistically high prices in the past and the resultant rise in debt levels. TOP

Prospects
The Indian hotel industry is still in the nascent stages of recovery. In the near
term, despite an anticipated revival in room demand, hotels will not be able to hike ARRs significantly as the expected additions to room inventory will intensify competition. Chennai, Pune and Hyderabad are expected to be among the worst-hit destinations, as the growth in supply is expected to far outpace that in demand. Though, events like the Formula 1 race planned in Delhi in 2011 will benefit the hotel industry. Nevertheless, the industry is yet to witness a sustained and significant improvement in occupancy levels and ARRs.

In the long-term, the outlook for the sector is very promising. Demand levels

are likely to improve as economic growth gathers momentum and companies increase spending on travel. With expectations of healthy salary increases within the corporate world, discretionary spending is expected to increase further, especially on leisure travel. The number of foreign tourists is expected to reach 6.2 m during 2011 and further to 11.1 m by 2021. The demandsupply gap in India is very real and there is need for more hotels in most cities. The shortage is especially true within the budget and the mid market segment. There is an urgent need for budget and mid market hotels in the country as travellers look for safe and affordable accommodation. The Indian hotel industry is on an expansion spree, with several companies announcing investment plans. Investment in Travel & Tourism is estimated at Rs 1.2 trillion in 2011 and is expected to reach Rs 2.8 trillion by 2021 (implying a CAGR of 8.7%), according to World Travel and Tourism Committee (WTCC) estimates. However, in light of the cash crunch and high interest rates, the players are approaching fresh expansion projects with caution.

While the long term fundamentals remain strong, the sector is highly

dependent on external factors which could possibly mar its performance.

Investment & Finance Sector Analysis Report

With the country's largest development financial institutions (DFIs) like ICICI

and IDBI having been converted into banking entities, the term DFI has lost its relevance in the country. Institutions that today have replaced them in playing a vital role in long-term financing and project financing are Non Banking Financial Companies (NBFCs), which have their relative specializations, e.g. HDFC (mortgage loans), IDFC (infrastructure loans), Mahindra Finance & Shriram Transport Finance (auto loans). The trend of segmental monopoly is changing as banks are entering long-term finance and FIs also meeting the medium and short - term needs of the business masses

NBFCs have come a long way from an era of concentrated regional

operations, low credibility and poor risk management practices to highly sophisticated operations, pan-India presence and as an alternate choice of financial intermediation. Today, NBFCs are present in the competing fields of vehicle financing, housing loans, hire purchase, lease and personal loans. More often than not, NBFCs are present where the risk is higher (hence the returns), reach is required (strong last-mile network), recovery needs to be the focus area, loan-ticket size is small, appraisal and disbursement has to be speedy and flexibility in terms of loan size and tenor is required.

NBFCs' growth had been constrained due to lack of adequate capital. Going

forward, we believe capital infusion and leverage thereupon would catapult NBFCs' growth in size and scale. A number of NBFCs have been issuing nonconvertible debentures (NCDs) in order to increase liquidity in their balance sheets. Also to address this purpose, especially in the infra financing space, a new category of NBFCs was formed called Infrastructure Financing Companies (IFCs)

NBFCs are not required to maintain cash reserve ratio (CRR) and statutory

liquid ratio (SLR). Priority sector lending norm of 40% (of total advances) is also not applicable for them. While this is to their advantage, they do not have access to low-cost demand deposits. As a result their cost of funds is always high, resulting in thinner spreads. However, the regulatory arbitrage may soon change between the two entities with the help of the Usha Thorat committee recommendations, which call for stricter regulations in the space.

Key Points
Supply Plenty to meet personal finance needs but not enough to meet long-term infrastructure needs. India is a growing economy, demand for long-term loans, especially infrastructure and personal finance is high. Licensing requirement, investment in technology, skills required for project finance, distribution reach, minimum Demand

Barriers to entry

capital requirements, etc Bargaining power of suppliers Bargaining power of customers Competition Providers of funds could be more demanding. As quality of services provided with minimum time matters a lot. High, as banks have also forayed into the long-term finance. High. There are public sector, private sector and foreign banks along with non-banking finance companies competing in similar markets. TOP

Financial Year'11
The RBI is looking at monitoring the NBFC sector to a greater extent now. As
per its recent set of regulations, it recently announced that bank funding to and buying of gold loans from (assignment) will not be classified as priority sector any longer. Also as per the latest industry guidelines, only loans to microfinance companies can be classified under priority sector loans.

The regulators governing the financing of the real estate sector, the RBI and

the NHB (National Housing Bank), clamped down on aggressive lending in the space. In their effort to tame speculation in real estate prices, provisioning norms on all outstanding loans was steeply hiked from 0.4% to 2%. This was irrespective of whether these assets were performing or non performing assets (NPA). Further, if the non dual rate loans turn into NPAs in light of the increased interest rates, the institutions have to make further provisions for the same. Additional regulations on maintaining a certain loan to value ratio and on loan size were also mandated.

The RBI announced in its latest budget that will give additional branch

licenses to private sector banks and NBFCs that meet the central bank's eligibility criteria. These new licenses should be awarded shortly. A number of NBFCs, microfinance companies and industrial houses are planning to opt for the same

The Budget allocated higher funds for the development of the power sector
with a view of speeding up the expansion of new generation capacities. Higher exposure limits for banks to finance UMPPs (ultra mega power projects) and other power projects was granted. Plan allocation for infrastructure sector has been increased by 23% to Rs 2.1 trillion in FY12.

Housing finance companies like HDFC and LIC Housing Finance as well as

some PSU banks that have extended presence in the semi urban and rural areas will benefit from the interest sops offered on low cost housing loans. The scheme of 1% interest subvention on housing loan up to Rs 15 lakh (Rs 10 lakh previously), where the cost of the house does not exceed Rs 25 lakh (20 lakhs) has been extended up to March 31, 2012, benefitting these players. TOP

Prospects

 The mortgage penetration continues to remain abysmally low - in India the

mortgage to GDP ratio is at around 9% (in FY11) against over 80% in the USA. Even if one were to benchmark against more comparable counterparts, the ratio ranges between 20% (China) to 41% (Hong Kong) for most South East Asian nations.

Since March 2010, the RBI was on the offense, raising key policy rates 11

times. The current interest rate environment is putting pressure on the margins of financing companies and is also leading to a slowdown in GDP growth and infra activity in the country

The power sector has also been facing myriad issues right from coal linkages

and land acquisition worries to environmental concerns. Slowdown in the infrastructure space due to the central banks aggressive interest rate policies also did not help matters much for power and infrastructure financiers including REC, PFC and IDFC.

According to the recommendations of the Usha Thorat committee, the core

Tier-1 capital ratio for NBFCs needs to reach 12% over the next three years. Thus if these recommendations are accepted, companies will have to shore up their capital sufficiently to account for growth as well as regulatory requirements. Provisioning and other norms may also be brought similar to that of banks in a phased manner.

As per the committee, risk

weights for NBFCs not sponsored by banks or that do not have any bank as part of the group may be raised to 150% for capital market exposures and 125% for commercial real estate exposures. Thus, there are a number of regulatory concerns that still need to be ironed out with regards to this space. However the Source: HDFC FY11 presentation prospects of certain players receiving a banking license, and limits on risky exposures, and maintaining capital buffers are welcome reforms.

Media Sector Analysis Report

Indian media industry is expected to grow at an annual average growth rate of
14% over the next 5 years. The industry comprises of print, electronic, radio, internet and outdoor segments. The size of the print segment is about Rs 193 bn, while the radio segment is about Rs 10 bn. Advertising revenue will continue to be the industry's growth driver. In print, the contribution from advertising revenue is likely to change from 65% at present to 75% by 2015.

There are nearly 138 m television households in India. Cable penetration has

reached 80% with the help of Direct to Home (DTH) platform. DTH segment comprises of 28 m homes. The digital subscribers are expected to outdo the analog subscribers by 2013. The players in the electronic media can be classified into a three-link chain. First are the studios (including the animation studios), which comprise the hardware part of the industry, the second are the content providers and the third link comprises the distribution trolleys, which include the cable and satellite channels, multiplex theatres, MSOs and the DTH players.

In India, the ratio of advertising expenditure to GDP is about 0.4%. This is

substantially lower in comparison to the developed economies as well as developing economies. As the Indian economy continues to develop and the media reach increases, the advertising expenditure to GDP ratio is expected to increase over the next 5 years.

Key Points
Supply Of the more than 70,000 newspapers printed in India, around 90% are published in Hindi and other vernacular languages. In the electronic media, the total number of channels presently available to viewers in India stands at close to 550. The demand for regional print media is growing at a faster pace than that of English language print media. In the electronic media, the highly fragmented viewership has led to an increasing preference for niche channels. In the electronic media, it is high for broadcasting since it is very capital-intensive. It involves the cost of leasing the transponder, setting up up-linking facilities, setting up pre and post-production facilities. The barriers to entry are far lower for content providers. Besides, broadcasters themselves commission programmes and finance their production. Hence margins are lower. The broadcasters are finding it increasingly difficult to retain their key personnel. In spite of the high barriers to entry a slew of channels across languages and genres have been launched in the recent past. In the print media, high for newsprint suppliers. It is medium to low for content providers in the electronic media. Terrestrial broadcasters such as Doordarshan and regional broadcasters

Demand

Barriers to entry

Bargaining power of suppliers

such as Sun TV actually commission time slots to content providers. Bargaining power of customers Relatively high in both print and electronic media. The consumer finds a surfeit of players to choose from. The rollout of CAS and DTH services will enable the consumer to choose the channels that he wishes to view increasing his bargaining power. High in print media, especially in Hindi dailies. The print sector includes listed entities like Jagran Prakashan, HT Media and Deccan Chronicle. Regional print media too is seeing increasing competition. Competition is high amongst broadcasters especially for general entertainment channels. The space includes listed entities like Zee TV, TV 18, UTV, NDTV and Sun TV. TOP

Competition

Financial Year '11

This year saw a surge in DTH subscription number which was 28 m as in
December 2010. This implied a growth of 75% over the previous year. The government is attempting to shift towards complete compulsory digitization by March 2015.

Two television industry giants (Zee and Star) came together to sign a

distribution alliance for distributing their content. This is set to change the industry dynamics in the medium term by resolving issues of piracy and under reported numbers by cable operators. The year also saw active participation from the private equity players.

In anticipation of the growing demand in the regional markets, media players

have been aggressively targeting these. While print companies entered into newer territories by launching newspapers in the local languages, television channels have been focusing on regional channels as well as content suited for regional audience.

This year saw substantial growth in advertising revenue. Advertising

accounted for 41% of the overall revenues in the sector in CY 2010. Advertising revenue from all segments of the print industry grew substantially. TOP

Prospects
The fortunes of the media industry are linked to the growth in the economy.
India is set to grow at a rate of at least 8% in years to come. Rising incomes in the hands of people encourage them to spend more on discretionary items like media and entertainment.

The demographic profile of India also favours higher spend on entertainment,

with the consuming class forming a sizeable chunk of the country's total households. Thus, this could lead to the emergence of a huge consumer base for the various products and services (including entertainment).

 New distribution technologies like DTH, Conditional Access System (CAS)

and IPTV, hold the future of the media industry as increasing digitization will radically alter the ways in which consumers receive channels. Also, these distribution platforms will give broadcasters direct access to consumers providing not just routine content but also customized value added services (like video on demand). As a result of this, the average revenue per user will increase significantly. Moreover, broadcasters are also expected to rake in larger advertisement revenues, as ad spend is likely to go up on the back of the robust economic growth.

With metros already being saturated, regional markets provide ample scope
for growth in the media sector. In print media, newspapers are being published in vernacular language, In Television, newer channels are introduced in local languages. Tier II and Tier III cities and towns are set to drive the Indian consumption story in the next few years.

New Media is gaining more and more importance. 3G services have now

been launched in India. Although the initial response is not so good, it is expected that people will start using the digital mode for viewing content once the infrastructure issues get resolved. TOP

Paints Sector Analysis Report

3
[Key Points | Financial Year '11 | Prospects | Sector Do's and Dont's]

The paint industry volume in India has been growing at 15% per annum for

quite some years now. As far as the future growth prospects are concerned, the industry is expected to grow at 12-13% annually over the next five years. FY11 was a challenging year for the industry as a whole due to subdued demand across key sectors and rising inflation.

The unorganised sector controls around 35% of the paint market, with the

organised sector accounting for the balance. In the unorganised segment, there are about 2,000 units having small and medium sized paints manufacturing plants. Top organised players include Asian Paints, Kansai Nerolac, Berger Paints and ICI.

Demand for paints comes from two broad categories:

Decoratives: Major segments in decoratives include exterior wall paints, interior wall paints, wood finishes and enamel and ancillary products such as primers, putties etc. Decorative paints account for over 72% of the overall paint market in India. Asian Paints is the market leader in this segment. Demand for decorative paints arises from household painting, architectural and other display purposes. Demand in the festive season (SeptemberDecember) is significant, as compared to other periods. This segment is price sensitive and is a higher margin business as compared to industrial segment. Industrial: Three main segments of the industrial sector include automotive coatings, powder coatings and protective coatings. Kansai Nerolac is the market leader in this segment. User industries for industrial paints include automobiles engineering and consumer durables. The industrial paints segment is far more technology intensive than the decorative segment.

The paints sector is raw material intensive, with over 300 raw materials (30%

petro-based derivatives) involved in the manufacturing process. Since most of the raw materials are petroleum based, the industry benefits from softening crude prices.

Key Points
Supply Supply exceeds demand in both the decorative as well as the industrial paints segments. Industry is fragmented. Demand for decorative paints depends on the housing sector and good monsoons. Industrial paint demand is linked to user industries like auto, engineering and consumer durables. Brand, distribution network, working capital efficiency and technology play a crucial role. Price increase constrained with the presence of the Demand

Barriers to entry Bargaining

power of suppliers

unorganised sector for the decorative segment. Sophisticated buyers of industrial paints also limit the bargaining power of suppliers. It is therefore that margins are better in the decorative segment. High due to availability of wide choice.

Bargaining power of customers Competition

In both categories, companies in the organised sector focus on brand building. Higher pricing through product differentiation is also followed as a competitive strategy. TOP

Financial Year '11

FY11 was a mixed bag for the paint companies. While all the 3 players viz.
Asian Paints, Kansai Nerolac and Berger Paints reported strong growth in sales, operating margins came under severe pressure due to raw material price inflation. Top-line growth was boosted by strong demand from the decorative paints segment. Nonetheless, the demand environment in the industrial segment continues to remain challenging due to rising interest rates.

Performance on the margins front was a big disappointment. Rising prices of

crude oil and titanium dioxide increased the overall expenditure thereby impacting profitability growth. However, companies are undertaking a gradual and calibrated price increase to shield margins. Nonetheless, as a complete pass on of raw material price increase is not possible in the industrial segment, the blended margins continue to suffer.

All the key players are in an expansion phase. Asian Paints' plant in

Khandala, Maharashtra is under construction and is expected to be commissioned by 4QFY13. Kansai Nerolac's capacity expansion plans at Jainpur and Hosur culminated during the year. Berger Paints has also undertaken capacity expansion for its plants located in Andhra Pradesh and Goa. Further, it is also contemplating to set up a manufacturing facility in Pune, Maharashtra. TOP

Prospects
The market for paints in India is expected to grow at 1.5 times to 2 times GDP
in the next five years. With GDP growth expected to be over 7% levels, the top three players are likely to clock above industry growth rates, especially given the fact that protection that was available to unorganised players has come down significantly.

Decorative paints segment is expected to witness higher growth going

forward. The fiscal incentives given by the government to the housing sector have benefited the housing sector immensely. This will benefit key players in the long term.

Although the demand for industrial paints is lukewarm it is expected to

increase going forward. This is on account of increasing investments in infrastructure. Domestic and global auto majors have long term plans for the

Indian market, which augur well for automotive paint manufacturers like Kansai Nerolac and Asian-PPG. Increased industrial paint demand, especially powder coatings and high performance coatings will also propel topline growth of paint majors in the medium term.

Petrochemicals Sector Analysis Report

Petrochemicals, as the name suggests, are chemicals obtained from the

cracking of petroleum feedstock. Petrochemicals are used in many manufacturing fields. The industry is built on small number of basic commodity chemicals, also known as building blocks such as ethylene, propylene, butadiene, benzene, toluene and xylene. Ethylene, propylene and butadiene are commonly referred to as olefins, while benzene, toluene and xylene are known as aromatics. Together, they form the basis of all petrochemical products. The broad product segments of the industry include basic petrochemicals, polymers, polyesters, fibre intermediaries and chemicals.

Petrochemicals production process consists of primarily two stages. In the first

stage naphtha, produced by refining crude oil or natural gas is used as a feedstock and is cracked. Cracking (breaking of long chain of hydrocarbon molecule) produces olefins and aromatics. In stage two, these building blocks are polymerized (made to undergo chemical processes) to produce downstream petrochemical products (polymers, polyesters, fibre intermediaries and other industrial chemicals. The industry is oligopolistic in nature with four main players dominating the sector noticeably Reliance Industries Ltd (RIL), Indian petrochemicals Corporation Ltd (IPCL), Gas Authority of India Ltd (GAIL) and Haldia Petrochemicals Ltd (HPL). RIL, along with IPCL, accounts for 70% of the petrochemical capacity in the country. However, the downstream petrochemical sector, especially polyester, is highly fragmented with more than 40 companies. This fragmented structure adversely affects the health of the industry.

Petrochemical industry is a cyclical industry.Globally, the petrochemical

industry is characterized by sluggish demand and volatile feedstock prices. India's current per capita consumption of polyester is 1.4 kg, whereas China's and global per capita consumption is five times and three times higher respectively. Similarly, the 5 kg per capita consumption of polymers in India is one-fifths for the entire world. India accounts for 3.1% of the total world polymer consumption of 200 mtpa.

Key Points
Supply Supply currently outstrips demand. In India, as refineries are expanding capacity leading to increase in production of naphtha, we believe it's going to increase further. Demand of the petrochemicals generate from the downstream industries, which in turn are dependent on the state and growth of the economy. Indian economy is poised to grow 9.2% for the next few years. Thus, the demands for the petrochemical products are bound to be on the higher end. The petrochemical industry is capital-intensive by nature. The

Demand

Barriers to

entry

minimum economic size of an integrated plant is around 1 million tonnes per annum, which in turn calls for huge investments. Moderate to low, despite the surplus naphtha production in the country, bargaining power of suppliers seems to be moderate. This is due to the fact that the suppliers are concentrated. However, going forward, integration is a mantra' for the oil refining companies. Moderate to low, the downstream user industry is fragmented, which reduces their collective bargaining power. Import duties on the products have declined significantly over the past and with additional capacities coming up in the Middle East the bargaining power of the customers might improve to an extent. Competition within the domestic market is limited, as there are only a handful of players with world-class capacities. However, with reduction in duties, there is threat of imports from Middle East and the Asia Pacific region, which is going to increase the competition. Also, the refineries are getting integrated, which will reduce the industry concentration in terms of market share and in turn fuel competition. TOP

Bargaining power of suppliers

Bargaining power of customers

Competition

Financial Year '10

In FY 10, global growth recovery stimulated the consumption of
Petrochemicals, mainly driven by India and China, with Asian crackers operating in excess of 100% leading to steady margin recovery. The operating rates improved vastly for U.S (92%) with export opportunity in Asia and advantageous gas prices. European crackers operated lower at 83%, witnessing high closures and impact of supply from Middle East. However, the delays in Middle Eastern start ups and robust Asian demand forestalled oversupply issues for polyolefins.

As per reports released by the Union Finance Ministry's Economic Survey for

the fiscal 2009-10, the net industry turnover in petrochemicals stood at Rs 220 billion.

There was a strong demand growth ranging from 9% for PE to 29% for PVC
and Indian market is expected to grow driven by growing consumer market.

Domestic polyester industry witnessed a growth of 15% YoY in FY 10.Excise

duty was increased from 2% to 10% in Budget 2010-11 and interest subsidy has been extended to exporters till March 11. International cotton prices witnessed a steep rise in prices- March 10 prices up by 65% Y-o-Y - amidst lesser availability and increased demand. PFY industry witnessed a growth of 14% YoY and a capacity addition of 450 KTA. The operating rates for FY10 were 80%, expected to stabilize in 2011-12. PSF industry witnessed a 12% YoY growth rate and operating rate of 70% TOP

Current scenario and prospects

Government has put in place a national policy on petrochemicals and has
initiated steps to create mega integrated complexes called petroleum, chemicals and petrochemicals investment regions (PCPIRs). These PCPIRs will be set up in a 2,000 sq km area with an estimated investment of $280 bn. As 100% FDI is permissible in chemical industry, this should provide a boost to the sector. It is expected that domestic petrochemical sector will double its production capacity in next four five years.

Currently, R&D expenses of the industry are about Rs 2.2 bn (1% of the

overall industry's turnover). With an approximate cost of Rs 4.4-6.6 bn, Government has provided for a policy of generating R&D centres for modernisation of the petrochemical industry. With this format, the government is aiming at a low-priced high-return involvement in the petrochemical segment, via public-private-partnership (PPP), to market the development of new applications of polymers and plastics, by establishing such centres of excellence (CoEs).

Operating rates are expected to bottom out in 2010. Demand in Asia,

especially in India and China is expected to remain high leading to high cotton prices and stable margins from polyester products. This, along with project delays by Middle East could lead to the next super cycle in coming years.

Pharmaceuticals Sector Analysis Report

The Indian Pharmaceutical industry is highly fragmented with about 24,000

players (around 330 in the organised sector). The top ten companies make up for more than a third of the market. The Indian pharma industry grew by a robust 18% YoY in 2011 to ` 565 bn (approx. US$ 12.5 bn). It accounts for about 1.4% of the world's pharma industry in value terms and 10% in volume terms. Besides the domestic market, Indian pharma companies also have a large chunk of their revenues coming from exports. While some are focusing on the generics market in the US, Europe and semi-regulated markets, others are focusing on custom manufacturing for innovator companies. Biopharmaceuticals is also increasingly becoming an area of interest given the complexity in manufacture and limited competition. The drug price control order (DPCO) continues to be a menace for the industry. There are three tiers of regulations - on bulk drugs, on formulations and on overall profitability. This has made the profitability of the sector susceptible to the whims and fancies of the pricing authority. The new Pharmaceutical Policy 2006, which proposes to bring 354 essential drugs under price control has not been officially passed as yet and has been stiffly opposed by the pharmaceutical industry. The R&D spends of the top five companies is about 5% to 10% of revenues. This ratio is still way below the global average of 15% to 20% of sales. Indian companies have adopted various strategies for their R&D efforts. Some have entered into collaboration and partnership agreements with innovator companies; others have out-licensed their molecules for milestone payments. Hiving off R&D units into separate companies has also become a preferred option for many Indian pharma players. That said, given that the research pipelines of Big Pharma are drying up, they have now begun to dabble in generics. In this regard, these innovator companies are either buying out Indian firms or are forging alliances with them.

Key Points
Supply Higher for traditional therapeutic segments, which is typical of a developing market. Relatively lower for lifestyle segment. Very high for certain therapeutic segments. Will change as life expectancy, literacy increases. Licensing, distribution network, patents, plant approval by regulatory authority.

Demand

Barriers to entry

Bargaining power Distributors are increasingly pushing generic products in a of suppliers bid to earn higher margins. Bargaining power High, a fragmented industry has ensured that there is of customers widespread competition in almost all product segments.

(Currently also protected by the DPCO). Competition High. Very fragmented industry with the top 300 (of 24,000 manufacturing units) players accounting for 85% of sales value. Consolidation is likely to intensify. TOP

Financial Year '11

FY11/CY10 was a strong year for domestic pharma companies on back of
strong growth in both domestic and exports sales. There was good growth seen in generics especially in the US and the semi regulated markets. Europe continued to face pressure. Companies focusing on custom manufacturing for innovators did not see a sign of recovery this year as well. Further, the efforts of global innovators to entrench in the domestic market intensified with many strategic tie-ups and small acquisitions of Indian companies. Now with Abbott taking over Piramal's domestic division and Daiichi Sankyo having acquired Ranbaxy, 2 of the top 3 players in the Indian market are MNCs. Another problem which continued to hamper the pharma sector was the stringency of the US FDA while inspecting manufacturing plants. Ranbaxy and Sun Pharma are yet to come to a resolution with respect to their plants with the US FDA. Aurobindo Pharma was new in the list to receive the warning letter for one of its biggest manufacturing unit. In the domestic market, FY11 was a decent year for the pharmaceutical industry with most of the top players managing to clock a double-digit growth. However, it was the chronic therapy segment, which once again stole the thunder of the acute therapy segment. While the former recorded a robust 18% YoY growth, the latter grew by 14% YoY. MNC pharma companies did well during FY11/CY10. On an average, they were able to clock topline growth in the range of 10% to 15%. On the margin front, performance was not good. Most of the companies saw increase in costs on the raw material costs and employee costs. The intensifying competition led to higher attrition and the industry is facing huge increase in the employee costs. TOP

Prospects
The product patents regime heralds an era of innovation and research
resulting in the launch of new patented product launches. In the longer run, domestic companies would face fresh competition from MNCs, as they would make aggressive new launches. However, the latter would most likely be subject to price negotiation. Drugs having estimated sales of over US$ 100 bn are expected to go off patent between CY10 and CY14. With the governments in the developed markets looking to cut down healthcare costs by facilitating a speedy introduction of generic drugs into the market, domestic pharma companies will stand to benefit. However, despite this huge promise, intense competition and consequent price erosion would continue to remain a cause for concern. The life style segments such as cardiovascular, anti-diabetes, antidepressants and anti-cancers will continue to be lucrative and fast growing owing to increased urbanisation and change in lifestyle patterns. High growth in domestic sales in the future will depend on the ability of companies to align their product portfolio towards the chronic segment as the lifestyle diseases

like hypertension, congestive heart failure, depression, asthma, and diabetes are on the rise. Contract manufacturing and research (CRAMS) is expected to gain momentum going forward. India's competitive strengths in research services include English-language competency, availability of low cost skilled doctors and scientists, large patient population with diverse disease characteristics and adherence to international quality standards. As for contract manufacturing, both global innovators and generic majors are finding it profitable to outsource production. Although the scenario has yet not improved for this space after the financial crisis, it is expected to improve going forward as the pressure to prune costs increases.

Power Sector Analysis Report

3
[Key Points | Financial Year '11 | Prospects | Sector Do's and Dont's]

With the coming of Electricity Act 2003, the power sector, which was highly

regulated with lot of licensing requirements, was supposed to be in the throes of a long awaited change. But things are still happening very slowly on ground. The sector is facing serious delays in terms of capacity expansion. The Eleventh Five-Year Plan (2007-12) target of setting up 78,000 MW of new generation capacity has already been lowered by around 25%. And even the revised target seems unattainable given the current progress.

The key problems hindering the growth of the power sector are land, fuel,

environment, and forest clearances. Even the government is finding it very difficult to get the required land for allotting to power projects. One of the key problems in getting land is Naxalism in the eastern and central states, where a large number of projects are being planned owing to abundance of fuel resources.

Central institutions like NTPC and the State Electricity Boards (SEBs) continue
to dominate the power sector in India. India has adopted a blend of thermal, hydel and nuclear sources with a view to increasing the availability of electricity. Thermal plants at present account for 65% (115,650 MW) of the total power generation capacity in India. This is followed by hydro-electricity (22% share; 37,367 MW). The rest comes from nuclear and wind energy.

Average transmission and distribution losses (T&D) exceed 25% of total power
generation compared to less than 15% for developing economies. The T&D losses are due to a variety of reasons, viz., substantial energy sold at low voltage, sparsely distributed loads over large rural areas, inadequate investment in distribution system, improper billing and high pilferage.

Key Points
Supply Many projects have been planned but due to slow regulatory processes and inadequate equipments and fuel, the supply is far lesser than demand. Currently, India needs to double its generation capacity over the next decade or so to meet the potential demand. The long-term average demand growth rate is 7-8% per annum and is expected to grow at faster rate in the future. Barriers to entry are high, especially in the transmission and distribution segments, which are largely state monopolies. Also, entering the power generation business requires heavy investment initially. The other barriers are fuel linkages, payment guarantees from state governments that buy power and retail distribution license. Not very high as government controls tariff structure. However, this may change in the future.

Demand

Barriers to entry

Bargaining power of suppliers

Bargaining power of customers Competition

Bargaining power of retail customers is low, as power is in short supply. However government is a big buyer and payments from it can be erratic, as has been seen in the past. Getting intense, but there is enough room for many players. The Electricity Act 2003 aims to encourage investments, thereby increasing competition. TOP

Financial Year '11

Total power generation
stood at 811 bn units (BU) in FY11, as compared to 771 BU in FY10. This represented a growth of just around 5%, when the requirement is anywhere around 10-12% per annum. FY11 also witnessed peak shortage in availability of critical fuel coal which hampered capacity addition in the power sector.

Data source: CEA

The average PLF in the Central Public Sector Undertakings and private sector
companies was much higher than that achieved by the SEBs as a whole in FY11. Wide inter-state variations were noticed in the average PLF of thermal power plants with southern and northern zones having better performances.

As far as T&D segments of the sector are concerned, there was little that

actually happened in FY11. The country continues to reel under the pressure of higher T&D losses and with the government going very slow with the reforms process in these segments, the long-term sustainable growth of the sector seems doubtful. TOP

Prospects
Recognising that electricity is one of the key drivers for rapid economic growth
and poverty alleviation, the industry has set itself the target of providing access to all households over the next few years. As per government reports, about 36% of the households did not have access to electricity. Hence, meeting the target of providing universal access is a daunting task requiring significant addition to generation capacity and expansion of the transmission and distribution network.

Coal costs from both domestic linkages and imported sources are expected to
be on the rise. Shortfall of coal in India is expected to go up to 100 MMT (m metric tonnes) by FY14. Availability of coal from domestic linkages would suffice only 55 to 60% of the PLF equivalent. Hence purchase of coal by way of Coal India's e-auction would only become more expensive.

Restoration of the financial health of SEBs and improvement in their operating

performance continue to remain a critical issue in the power sector.

On an overall basis, power distribution has been loss-making business in

India. But with the privatization coming in, the investment in transmission and distribution networking is expected to improve.

Trading in electricity has brought a sea change in the structure of the industry

because some parts of country are power surplus and some are deficient. A power trading company buys power from surplus area and sells it in a power deficit area through transmission lines. While the potential for power trading is huge, the regulator has to play a key role in removing all discrepancies that occur in terms of electricity pricing across trading regions.

Retailing Sector Analysis Report

[Key Points | Financial Year '11 | Prospects | Sector Do's and Dont's]

Currently, India is the 5th largest retail market in the world. The market size in

2010 was estimated at US$ 353 bn (Source: IBEF) and is expected to reach US$ 543 bn by 2014. Retailing has played a major role the world over in increasing productivity across a wide range of consumer goods and services. In the developed countries, the organised retail industry accounts for almost 80% of the total retail trade. In contrast, in India organised retail trade accounts for merely 5% of the total retail trade. This highlights tremendous potential for retail sector growth in India.
Consumption spending in India Segment Food Fashion Leisure and entertainment Fashion accessories Consumer durables Health, beauty and pharma Furniture Telecom Books and Music Others % contribution 62.0 9.5 7.9 5.5 4.0 3.8 3.4 1.8 1.1 1.0

The sector can be broadly divided

into two segments: Value retailing, which is typically a low margin-high volume business (primarily food and groceries) and Lifestyle retailing, a high margin-low volume business (apparel, footwear, etc). The sector is further divided into various categories, depending on the types of products offered. Food dominates market consumption followed by fashion. The relatively low contribution of other categories indicates opportunity for organised retail growth in these segments, especially with India being one of the world's youngest markets.

Source: Pantaloon Retail analyst report

Historically, Indians have been conservative spenders, thus food forms a huge

chunk of India's consumption needs. Transition from traditional retail to organised retailing is taking place due to changing consumer expectations, demographic mix, etc. With the revival in consumer spending, expansion plans of retailers are back in full swing. The convenience of shopping with multiplicity of choice under one roof (Shop- in Shop), and the increase of mall culture etc. are factors appreciated by the new generation. These are expected to be the growth drivers of organised retailing in India over the long run.

Key Points
Supply Players are now moving to Tier II and Tier III cities to increase penetration and explore untapped markets as Tier I cities have been explored enough and have reached a saturation level. Healthy economic growth, changing demographic profile, increasing disposable incomes, changing consumer tastes and preferences are some of the key factors that are driving and will continue to drive growth in the organised retail market in India. Reforms by India in opening up its economy have greatly improved trade prospects, but major barriers still exist such as

Demand

Barriers to entry

regulatory issues, supply chain complexities, inefficient infrastructure, and automatic approval not being allowed for foreign investment in retail. But, some of these are set to change with FDI in multi-brand retail set for approval. Bargaining power of suppliers The bargaining power of suppliers varies depending upon the target segment, the format followed, and products on offer. The unorganised sector has a dominant position, still contributing 95% of the total retail market. There are few players who have a slight edge over others on account of being established players and enjoying brand distinction. Since it is a capital intensive industry, access to capital also plays an important part for expansion in the space. High due to wide availability of choice. With FDI coming in, this will increase further. High. Competition is characterised by many factors, including assortment, products, price, quality, service, location, reputation, credit and availability of retail space etc. New entrants (business houses and international players) are expected to further intensify the competition and so would the foreign players' entry. TOP

Bargaining power of customers Competition

Financial Year '11

Retail sector was in news throughout the year. The ongoing attempt to bring in
foreign direct investment in retail continued and the proposal is through significant hurdles. It is now in the final stages and may see the light of the day soon.

In the budgetary speech, the Finance Minister announced that the optional levy

of excise duty on garment manufacturers would now be compulsory. Protests were staged all across the country against this measure. The retailers increased the prices of their goods in a phased manner. At first, to offset the rising prices of cotton and secondly to deal with the newly imposed excise duty.

Retailing companies are back to their expansion plans. But this time around,

the focus is on Tier II and Tier III cities and towns. Most of the retailers opened up new stores in places like Pune, Indore, Kochi, etc in their wake to tap the unsaturated potential in these markets. TOP

Prospects
Retail industry has been on a growth trajectory over the past few years. With
the economy back on track, retailers are executing their expansion plans. The industry is expected to grow at a rate of 12% per annum for the next 5 years.

The industry is eagerly awaiting the approval of the FDI in multi brand retail.

This, the players feel will help them in funding their operations and expansion plans. The expertise brought in by the foreign retailers will also improve the way the Indian retailers operate. It is expected to bring in more efficiency in the

supply chain functions of retailers.

Retail is mainly a volume game, (especially value retailing). Going forward, with
the competition intensifying and the costs scaling up, the players who are able to cater to the needs of the consumers and grow volumes by ensuring footfalls, while being able to reduce costs, withstand downturns, and face competition will have a competitive advantage.

Luxury Retailing is gaining importance in India. This includes fragrances,

gourmet retailing, accessories, jewellery among many others. Indian consumer is ready to splurge on luxury items and is increasingly doing so. The Indian luxury market is expected to grow at a rate of 25% per annum. This will make India the 12th largest luxury retail market in the world.

Rural retailing is now the focus for many retailers. It is observed that the rural
regions registered saw consumption even during the economic slowdown. Rural India accounts for 2/5th of the total consumption in India. Thus, the industry players do not want to be left out and are devising strategies suited especially to the rural consumer.

Shipping Sector Analysis Report

Shipping is a global industry and its prospects are closely tied to the level of

economic activity in the world. A higher level of economic growth would generally lead to higher demand for industrial raw materials, which in turn will boost imports and exports. The shipping market is cyclical in nature and freight rates generally tend to be volatile.

Freight rates and earnings of the shipping companies are primarily a function

of demand and supply in the markets. While demand drivers are a function of trade growth and geographical balance of trade (which determines the length of haul required), the supply drivers are a function of new ship building orders as well as scrapping of existing tonnage.

The global shipping industry can be broadly classified into wet bulk (like crude
and petroleum products), dry bulk (like iron ore and coal) and liners. Under liners, it has containers, MPP and Ro-Ros types of vessels. There are various benchmarks that determine freight rates for these segments. The prominent amongst them are Baltic Freight Index, Baltic Handymax Index (for dry bulk segment) and World Scale (for tankers).

Key Points
Supply Demand Barriers to entry Determined by the addition to shipping capacity Closely related to growth in world trade. Highly capital intensive and adequate cash flows required for funding working capital requirements. Moreover, expertise and technical know-how are critical factors.

Bargaining power Diminishing with gradual increase in fleet supply and of suppliers intense global competition. Bargaining power High bargaining power as competition is high in the of customers industry. Competition Competition is price based. However, companies with younger fleet command a premium. TOP

Financial Year '10

The effects of the downturn in the aftermath of the financial crisis continued to
be felt by the shipping industry in FY10. This was both in the dry bulk and crude carrier segments. Freight rates remained under pressure as demand took a hit. On an average, while crude tanker rates declined by 15% by the

end of FY10, dry bulk freight rates were almost flat.

The crude and product tanker market experienced its worst period during the

first quarter of FY10 (July to August 2009). On the other hand, the dry bulk segment recovered somewhat during this period. This was mainly on the back of high unforeseen demand for stockpiling of dry bulk commodities (like foodgrains and metals) from China. TOP

Prospects
In line with the revised higher estimates of global economic growth and upturn
in global consumption, the shipping freight rates have posted some improvement in the current year. Anyways, the outcome of the ongoing European crisis as well as impact of the new-building deliveries would be critical for the future direction of shipping rates.

While the European crisis is challenging the sustainability of the global

economic recovery, thereby regenerating demand side concerns, these are overshadowed by a bigger threat of oversupply for the shipping industry. This looms large in the near future. Out of the existing order books in all the three segments of dry bulk, crude, and product tankers, most of the vessels are due for delivery in 2010 and 2011. This will add to the pressure on freight rates, and would thus impact the profitability of shipping companies.

Apart from the Euro zone crisis, another concern for the shipping industry the

cooling down of the Chinese economy, which can regenerate demand-side concerns. This combined with the supply-side pressures, may just worsen the outlook for the sector.

The increase in India's refining capacity and a pick-up in oil exploration activity
globally will benefit the offshore shipping lines as demand for their services picks up. As a result of the commissioning of large domestic refining capacities, the import of crude is expected to jump in the future. This would benefit shipping majors.

Under investment in earlier years, surge in Chinese growth and scrapping of

vessels built in 1970s have all created conditions for a strong market for tankers, barring the periods of crises. Further, the gap in charter rates between single hull and double hull vessels is widening as more charterers prefer double hull tonnage and many states impose restrictions on single hull tonnage. In the coming years as single hull will be mandatorily required to be phased out, the demand for double bull tonnage will be strong. TOP

Software Sector Analysis Report

5
[Key Points | Financial Year '11 | Prospects | Sector Do's and Dont's]

The global IT spending increased exponentially for years before the onset of

global recession in 2008-09. Riding the wave, Indian Information Technology (IT) industry grew at impressive rates of above 30% during that time to the tune of over US$ 60. The global meltdown dented the scene, with businesses across the globe, cutting on discretionary IT budgets. However, it created a huge pent-up demand in the software sector. With the economic recovery, the sector witnessed a surge in the demand across markets, both traditional and emerging. As a result, Indian IT industry performed well on back of superior quality and execution efficiency.

Indias IT industry can be divided into five main components, viz. software

products, IT services, engineering and R&D services, ITES (IT-enabled services) and hardware. Export revenues primarily on project based services continue to drive growth. Multi-year annuity based outsourcing agreements are expected to increase going forward. However, the majority share of the project based revenues is going to continue on the back of custom application development and application management.

Cost leadership has been the competitive edge of the Indian software sector

over the last few years. However, this seems to be threatened now by MNCs who are replicating the Indian outsourcing model and setting up bases in the country. Going forward, the advantage of low employee costs could peter out and the sector could get commoditised.

Increasing competition, pressure on billing rates and increasing

commoditisation of lower-end application development and maintenance (ADM) services are among the key reasons forcing the Indian software industry to make a fast move up the software value chain. IT companies have to move up the value chain to provide higher value-added services as consulting, product development, R&D and end-to-end turnkey solutions. Therefore, companies have started shifting their focus towards high end as well as value added services to keep their competitive advantage intact. Now they are also looking at emerging business themes like analytics, mobility, cloud computing.

The software services segment of the industry continues to grow by leaps and

bounds. With the government emphasizing on better technology enabled delivery mechanisms for multitude of government projects such as e-passport, Unique Identification Scheme, eLearning, virtual classrooms, telemedicine, remote consultation, and mobile clinics, the domestic market looks equally more promising.

Key Points
Supply Abundant supply across segments, mainly lower-end, such as ADM. Lower in higher-end areas like IT/business consulting, integration, transformation, package implementation but competition is very tough. Despite rising uncertainties in the global economic

Demand

environment, the global IT spending is expected to increase. However, demand environment would remain volatile. At the same time, a good growth is expected in fast-growing economies such as India and China. Barriers to entry Low, particularly in the ADM segment this is prone to relatively easy commoditisation. High in high-end services like IT/business consulting where-in domain expertise creates a barrier. The size of a particular company/scalability and brandimage also creates barriers to entry, as these firms have built up long-term relationships with major clients. Low, due to intense competition (oversupply), particularly in the lower-end ADM space. Low differentiating power is also another reason. Bargaining power is high, at the higher end of the value chain.

Bargaining power of suppliers

Bargaining power of customers

High, mainly due to intense competition among suppliers/vendors. However, it is lower in higher-end services like consulting and package implementation.

Competition

Competition is global in nature and stretches across boundaries and geographies. It is expected to intensify due to the attempted replication of the Indian offshoring model by MNC IT majors and as well as small startups. TOP

Financial Year '11

As per NASSCOMs Strategic Review 2011 report, the global IT products
and services related spending reached US$ 1.6 trillion in 2010. This was a growth of 4.0% over 2009. This came on the back of 6.4% increase in worldwide hardware spend which witnessed a pent-up demand during economic recovery. Please note that the global hardware market was badly hit during 2008 meltdown, with almost 8% decline during the year. During 2010, IT services spend grew by 1.4%, within which IT outsourcing grew by 2.4%. Within IT outsourcing, global sourcing grew by 10.4% in 2010.

The Indian IT/ITES industry earned revenues of around US$ 88.1 bn during

FY11. The IT software and services industry (excluding hardware) accounted for US$ 76.1 bn.

At the end of FY11, the Indian IT/ITES directly employed around 2.5 m people
(an addition of 240,000 employees), while indirect job creation was estimated at 8.3 m. As a proportion of Indias GDP, the sector revenues have grown from 1.2% in FY98 to 6.4% in FY11. The industrys share of total Indian exports (merchandise plus services) increased from less than 4% in FY98 to 26% in FY11.

Indian IT firms (especially the top notch Indian firms like TCS, Infosys and

Wipro) are increasingly competing against top global players such as IBM, Accenture and EDS for large deals. The top Indian IT companies are more

frequently being invited to bid on large deals that were earlier closed to them. India's top outsourcers are competing effectively with the top three global service providers on large deals. Moreover, global IT biggies like Accenture who used to deal mostly in premium-priced high-end IT services have entered the space of low-end IT services at a competitive price. This has added to the competition. TOP

Prospects
The global IT services market is expected to grow by 3.5% in 2011, and 4.5%
in 2012 as companies are focusing not only on controlling costs but also increasing efficiency and productivity using more and more information technology to improve their competitive advantage.

Developed markets constitute the largest share of IT spend. However,

emerging markets are also contributing to the growth of the sector as a large consumer base is increasingly becoming tech-savvy. At the same time, many companies have started adopting IT solution to improve their global competitiveness. These emerging opportunities both in the global and domestic markets are expected to propel revenues from Indian IT sector to US$ 130 bn by FY15.

The integration of IT-BPO contracts is expected to become more common, as

clients look out for end-to-end service providers. Companies like Infosys, TCS, Wipro, Mahindra Satyam, HCL Technologies and Mphasis, all of which are also into BPO, will benefit from this trend.

Billing rates will remain stable with negative bias in short term. These would

not lead to the spectacular growth rates that most companies have been used to seeing in the past. Companies are expected to preserve their margins through effective cost containment, higher employee utilization, offshoring and shifting their focus towards high end as well as value added services. Lessons learnt during the crisis can benefit in the long run.

Attrition and Rupees volatility against the US dollar and other major

currencies is expected to remain a major concern for Indian IT companies.

Steel Sector Analysis Report

[Key Points | Financial Year '11 | Prospects | Sector Do's and Dont's]

India is currently the fifth largest steel-producing nation in the world with

production of over 65.6 million tonnes (MT). However, it has a very low per capita consumption of steel of around 51.7 kgs as against an average of 203 kgs of the world. This wide gap in relative steel consumption indicates that the potential ahead for India to raise its steel consumption is high.

During the period from 1997-98 to 2000-01, steel production witnessed a

marginal CAGR growth of 3%. However during 2001-02 to 2010-11, owing to boom in the infrastructure and automobile sectors, the industry witnessed a sharp turnaround and registered a steep hike of 8.6% CAGR.

Being a core sector, steel industry tracks the overall economic growth in the

long term. Also, steel demand, being derived from other sectors like automobiles, consumer durables and infrastructure, its fortune is dependent on the growth of these user industries.

The Indian steel sector enjoys advantages of domestic availability of raw

materials and cheap labour. Iron ore is also available in abundant quantities. This provides major cost advantage to the domestic steel industry, with companies like Tata Steel being one of the lowest cost producers in the world.

However, Indian steel companies have to bear additional costs pertaining to

capital equipment, power and inefficiencies (low per employee productivity). This has resulted in the erosion of the edge they would have otherwise enjoyed due to availability of cheap labour and raw materials.

India is likely to add 30 m tonnes of new steel capacity over the next 18

months, of which 21 m tonnes will be added by top five players. This will make India net exporter of steel from the current net importer.

Key Points
Supply With trade barriers having been lowered over the years, imports play an important role in the domestic markets. Currently India is net importer of steel. The demand is derived from sectors that include infrastructure, consumer durables and automobiles. High capital costs, technology, economies of scale, government policy.

Demand

Barriers to entry

Bargaining power Low for fully integrated players who have their own mines of suppliers for raw materials. High, for non integrated players who have to depend on outside suppliers for sourcing raw materials. Bargaining power High, presence of a large number of suppliers and access to of customers global markets.

Competition

High, presence of a large number of players in the unorganized sector. TOP

Financial Year '11

Steel being at the core of economic activity witnessed an unprecedented
downturn in 2009. The global steel production which had declined on account of the intervening global financial crisis, showed a sharp pick-up in 2010. All the major steel-producing countries and regions showed double-digit growth in 2010.

World crude steel production clocked an impressive output growth of 6.5%

against a negative growth of -0.5% in 2009. World steel production reached a new height during 2010 at 1,414 m tonnes as against 1,223 m tonnes in 2009. The EU registered the highest growth in production of crude steel by registering a growth of 24.5% over 2009. However, UK and Greece continued to decline over previous years. Asia posted the second highest growth followed by CIS countries. Most of the international steel companies witnessed a bounce back in their production level, however in many cases could not reach their pre-crisis production levels.

Global steel consumption also witnessed a bounce back and grew 13.1% to
1,283 m tonnes in 2010. Steel consumption in emerging and advanced economies grew 9.1% and 25% respectively in 2010.

The natural disasters in Japan and Australia have caused some uncertainty

over raw material prices and short term steel demand. In particular, the automotive and electronic industries may face shortages in supply where they are relying on Japan for manufacturing components. TOP

Prospects
Coking coal and iron ore are the two main raw materials used for making
steel. Both are in short supply. India's coking coal imports surged 39% in FY11 alone. Further government delays in allocating coal blocks for captive consumption by steel manufactures is seriously hurting the competitive edge of Indian steel sector. The same story is with iron ore. There are delays in allocating iron ore mines as well as approval for mining licenses. As a result no new investment on the ground in the steel sector is happening to add new steel capacities. The prices of these raw materials are also touching new highs which are further putting pressure on steel makers globally and they are showing no signs of coming down.

There are delays in clearances for mines, land acquisition for Greenfield

projects and environment approvals in India. There is thus delay in converting the intent into project on ground especially in the area of expansion and modernisation. This impedes growth of domestic steel capacity creation.

The Indian steel sector may face threat from cheap imports, now that the

import duties on steel in India are amongst the lowest in the world. Import pressures could consequently lead to pressure on margins of the domestic companies on account of lower steel realisations. However, if the Indian

government increases the import duty on steel products, domestic steel industry could get protection to an extent. But since India has already agreed to the WTO norms, it might become difficult for the government to increase duties substantially.

Going forward, we remain apprehensive about the continuation of the strong

performance by steel companies. We believe that volume growth would be visible in the years to come, largely due to the continuation of infrastructure spending (including housing), strong demand from the auto sector, which could help in driving demand for value added steel products like CR (cold roll) steel and exports. We expect realisations to remain under pressure on account of excessive supplies. However, a recovery in steel prices could be sooner if steel producers across the globe take continuous efforts at curtailing production.

The government over the last couple of years has continued to lay emphasis
on continuation of infrastructure activities in the country. Increased spending on infrastructure will be a key positive for the steel sector as the demand for steel will get a boost. The continuation of tax sops to the housing sector is another positive for steel demand.

Telecom Sector Analysis Report

India's teledensity has improved from under 4% in March 2001 to around 71%
by the end of March 2011. Cellular telephony has emerged as the fastest growing segment in the Indian telecom industry. The mobile subscriber base (GSM and CDMA combined) has grown from under 2 m at the end of FY00 to touch 812 m at the end of March 2011 (average annual growth of nearly 73% during this eleven year period). Tariff reduction and decline in handset costs has helped the segment to gain in scale. The cellular segment is playing an important role in the industry by making itself available in the rural and semi urban areas where teledensity is the lowest.

The fixed line segment has actually seen a decline in the subscriber base. It
has declined to 34.73 m subscribers in March 2011 from 36.96 m in March 2010. The decline was mainly due to substitution of landlines with mobile phones.

As far as broadband connections (>=256 kbps) are concerned, India currently

has a subscriber base of 11.9 m. It has grown at an average annual growth rate of 45% since 2008. The auction for broadband wireless license and spectrum was carried out last year. Once the operators complete their network rollouts, this will further boost the broadband penetration in the country.

Key Points
Supply Demand Intense competition has resulted in prompt service to the subscribers. Given the low tariff environment and relatively low rural and semi urban penetration levels, demand will continue to remain higher in the foreseeable future across all the segments. High capital investments, well-established players who have a nationwide network, license fee, continuously evolving technology and lowest tariffs in the world. Improved competitive scenario and commoditisation of telecom services has led to reduced bargaining power for services providers. A wide variety of choices available to customers both in fixed as well as mobile telephony has resulted in increased bargaining power for the customers. Competition has intensified with the entry of new cellular players in circles. Reduced tariffs have hurt all operators. TOP

Barriers to entry

Bargaining power of suppliers Bargaining power of customers

Competition

Financial Year '11

 FY11 saw the continuance of strong growth for the Indian telecom market, which witnessed a
39% YoY increase in its subscriber base during the 12-month period. At the end of March 2011, the country's total telecom subscriber base (fixed plus mobile) stood at about 846 m. The tele-density level stood at about 71% by the end of the fiscal.

Data source: Trai, Company Data

Data source: Trai, Company Data

Growth remained robust in the GSM mobile space. GSM added 220 m subscribers during the

year. After a good 22% YoY increase in subscriptions during FY10, the GSM industry clocked another robust performance during FY11, growing subscriber base by 46% YoY to about 698 m.

During FY11, India's mobile subscriber base grew by 39% YoY, from 584 m to 812 m, while
the fixed subscriber base declined by about 1%, from 36.96 m to about 34.73 m. TOP

Prospects
As far as the fixed line business goes, the low penetration levels in the country and the
increasing demand for data based services such as the Internet will act as major catalysts in the growth of this segment. The PSUs will however continue to retain their dominant position. This is on account of high capital investments required in setting up a nationwide network. As a result, the private sector players will have to rely on key business centers and pockets of high urbanisation for their growth.

Increasing choice and one of the lowest tariffs in the world have made the cellular services in

India an attractive proposition for the average consumer. The segment's subscriber base has grown by over 39% YoY in FY11. As per Pricewaterhouse Coopers, India's mobile subscriber base is expected to exceed 1 bn by 2014 and will be driven by additions in the rural areas. India's rural tele-density for mobile subscribers currently stands at 32.75%.

During FY11, a number of things were carried out. The government finally implemented mobile
number portability (MNP). The 3G spectrum was allotted to the operators who had been successful in the bidding process. The telecom scam was unearthed that highlighted the need for the new telecom policy.

The MNP was not as big a game changer as it was made out to be. As reported by TRAI, only

1% of the total subscriber base has opted for MNP. The other key development during the year was the rollout of the 3G services. Most operators have rolled out services in the circles for which they were granted the spectrum and license. And most of them are either in the process of or have already signed roaming agreements with other operators to provide 3G services in the circles for which they do not have the license. While it is still very early to judge the impact of 3G services, nevertheless, operators expect it to be the game changer in the future.

During the current fiscal year a lot of focus will be given to new policy initiatives in the industry.
The new telecom policy is expected to address several key issues that include guidelines for charging spectrum fee and for mergers and acquisitions in the sector. The operators are hopeful that these guidelines would be conducive for the growth of the sector as a whole. The

telecom minister has promised that the new telecom policy would be drafted by the middle of this fiscal year. He has also assured the industry that the policy would keep in mind the interest of the industry as well as that of the consumers.

In a latest move, some operators have raised their tariffs. The reason given by them is that

such a move is essential to cover the increasing costs of servicing the existing as well as the new customers. However, they have rolled out these price increases only in select circles to view its impact on subscriber additions as well as on minutes of usage (MOU). Indian consumers are known to be highly sensitive to price increases. Therefore, there are fears that net additions and/or MOUs may come under pressure through such increases. Another fear that operators have is what if other operators do not follow suit? This would lead to a loss of market share. While tariff increase will have to happen eventually, it remains to be seen if all operators would make this move in the current fiscal or not.

Textiles Sector Analysis Report

3
[Key Points | Financial Year '11 | Prospects | Sector Do's and Dont's]

The Indian textile industry contributed about 14% to industrial production, 4%

to the country's GDP and 17% to the country's export earnings in 2010. It provides direct employment to over 35 m people and is the second largest provider of employment after agriculture.

As per Technopak, most developed countries will see continued decline of

their textile and apparel industry and create fresh opportunity of up to US$ 140 bn for exports for developing countries by 2020.

According to the Textile ministry, Indian textile industry is expected to more

than double to US$ 115 bn by 2012. The domestic market is likely to increase from US$ 34.6 bn to US$ 60 bn by 2012. India's share of global textile exports is expected to increase from the current 4% to around 7% over the next threeyears. According to the Textile Association of India (TAI), the denim manufacturing capacity, which stands at 600-650 m metres per annum, is set to witness an addition by another 100 m metres wherein 70% focus will be on the domestic market.

India enjoys a significant lead in terms of labour cost per hour (US$ 0.6 in

2004), over developed countries like US and newly industrialised economies like Hong Kong, Taiwan, South Korea and China. Also, India is rich in traditional workers adept at value-adding tasks, which could give Indian companies significant margin advantage. However, India's inflexible labor laws have been a hindrance to investments in this segment. Unlike in home textiles, garment capacities are highly fragmented and leading Indian textile companies have been slow to ramp up their apparel capacities, despite strong order flows from overseas buyers who are trying to diversify out of China.

The textile industry aims to double its workforce over the next 3 years. As a
thumb rule, for every Rs1 lac invested in the industry, an average of 7 additional jobs is created.

Key Points
Supply The supply of denim has nearly doubled in the last 15 months. Most new capacities in the apparel and home textile segments are not operating at full capacities. High for premium and branded products due to increasing per capita disposable income.

Demand

Barriers to entry Superior technology, skilled and unskilled labour, distribution network, access to global customers Bargaining power of suppliers Because of over supply in the unorganised market like that of denim, suppliers have little bargaining power. However, premium products and branded players continue to garner

higher margins. Bargaining power of customers Domestic customers - Low for premium and branded product segments. Global customers- High due to presence of alternate low cost sourcing destinations. High. Very fragmented industry. Competition from other low cost producing nations is likely to intensify. TOP

Competition

Financial Year '11

Most companies in the sector timed their expansion plans FY04 onwards, so
as to avail themselves of the funding under TUF (Technology Upgradation Fund, offering loans at 6% subsidy). This led to the capex-spending phase in the textile sector peaking in the last three fiscals. However, with the slump in demand for textile products from the overseas markets, a number of companies had to defer their expansion plans due to large under-utilised capacities. With the government rejecting the proposal to continue the TUF scheme beyond the 11th plan (2007- 2012), the players looking to defer their capex plans will be hit. We believe that with higher interest rates, players in the sector would prefer to see the utilisation levels get normalised, before leveraging more for incremental capex. The global textile industry also faced the brunt of economic slowdown in FY11, wherein, exports to the US from two of its largest suppliers India and China dipped in terms of value and volumes respectively. While India sustained volumes because of better product quality as compared to China, it lost out in terms of realizations. Competitors like Vietnam, Bangladesh and Indonesia gained substantially because of relatively lower labour costs.

Troubled by the rupee's appreciation against the US dollar, thereby eroding

their competitiveness in the global market, textile exporters have demanded duty benefits and credit at lower interest rates.

According to the data from the ministry of textiles, cotton prices for medium-

long variety have escalated by 36% and for long variety by as much as 69% in the last one year. In contrast, prices of cotton yarn have increased by just 14 to 35%. The rise in key input prices has dealt a heavy blow to the operating margins of textile manufacturers. TOP

Prospects
Most large textile companies in India, realising the growth potential in
domestic retailing, have drawn up aggressive strategies to expand their footprint in the domestic market. These include companies like Welspun and Himatsingka, which were traditionally export-oriented, as also Raymond, which has been the pioneer in domestic textile retailing.

In addition to high raw material costs, an appreciating rupee and an increase

in employee's dearness allowance and shortage of labour are burning a hole in textile company's pockets

 Although home textile companies have recently been aggressive on the

capacity expansion front, realisations have remained stable. But as new capacities come on-stream and utilisation levels pick up, this is unlikely to continue. This is because although India continues to feature amongst the lowest cost producers for the US and EU markets, competitors like Pakistan and Turkey are cannibalising its market share. Moreover, with the possibility of slowdown in the western economies looming large, a slowdown in demand cannot be ruled out.

With retailers like Wal-Mart, JC Penney and GAP planning to substantially

increase their outsourcing from India and FDI in single brand retailing making its way into the country, the opportunities for domestic apparel exporters are immense. As per the Government of India targets, while India's textile export is poised to grow at an average annual rate of 15 to 20% over the next three years, its share in apparel and garment exports are set to double and triple respectively until FY15. However, oversupply led pricing pressures and forex losses continue to mar the long-term earnings visibility of the textile companies.

India and China are currently competing in the same categories (premium

segment) of apparels and home textiles and given India's established presence in the high end segment, India could gain significant market share in US apparel imports. However, the ongoing economic slowdown in the US could result in lower orders from US retailers that, in turn, may result in lower capacity utilisation and impact profitability of textile companies in India.

Caught on the wrong foot for alleged use of child labour and forced labour,

Indian apparel exporting industry has not been able to convince the US about its seriousness in eliminating labour abuse from the sector. The Indian textile industry that directly employs 6 m workforce to make apparel for the world's best brands is feared to find mention in the Trafficking Victims Protection Reauthorisation Act (TVPRA List).