1 Jan 2015 . Vol 2 Issue 1 . For Private Circulation Onlybackoffice.phillipcapital.in/Backoffice/Research... · 2 GROUND VIEW 1st Jan 2015 1st Jan 2015 GROUND VIEW 3 VOL 2 . ISSUE

1ST Jan 2015 . Vol 2 Issue 1 . For Private Circulation Only

3GROUND VIEW GROUND VIEW 1st Jan 2015 1st Jan 2015 2

VOL 2 . ISSUE 1 . 1ST JAN 2015

Vineet Bhatnagar- Managing Director and CEO

EDITORIAL BOARD:Naveen Kulkarni Manish AgarwallaKinshuk Bharti Tiwari Dhawal Doshi

ILLUSTRATIONS AND MAGAZINE DESIGN Chaitanya Modak, www.inhousedesign.co.in

FOR EDITORIAL QUERIES:PhillipCapital (India) Private LimitedNo. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400 013

RESEARCH Automobiles Dhawal Doshi, Priya Ranjan

Banking, NBFCs Manish Agarwalla, Pradeep Agrawal, Paresh Jain

Consumer, Media, Telecom Naveen Kulkarni, Jubil Jain

Cement Vaibhav Agarwal

Economics Anjali Verma

Engineering, Capital Goods Ankur Sharma, Hrishikesh Bhagat

Infrastructure & IT Services Vibhor Singhal

Metals Dhawal Doshi, Ankit Gor

Mid-caps Vikram Suryavanshi

Oil & Gas, Agri Inputs Gauri Anand, Deepak Pareek

Pharmaceuticals Surya Patra

Retail, Real Estate Abhishek Ranganathan, Neha Garg

Technicals Subodh Gupta

Production Manager Ganesh Deorukhkar

Sr. Manager – Equities Support Rosie Ferns

SALES & DISTRIBUTION Kinshuk Bharti Tiwari, Ashvin Patil, Shubhangi Agrawal, Kishor Binwal, Sidharth Agrawal, Bhavin Shah, Varun Kumar, Narayan Mulchandani

CORPORATE COMMUNICATIONS Zarine Damania

[email protected]


“Ground Zero” is now “Ground View”. We believe the new name captures the essence of what we are trying to achieve through this magazine in a better way. We hope you like our new name too! Here are some covers from the previous issues.

16th Dec 2014 Issue 12

16th Aug 2014 Issue 8

1st June 2014 Issue 4

15th Nov 2014 Issue 11

1st Aug 2014 Issue 7

1st May 2014 Issue 3

1st Oct 2014 Issue 10

1st July 2014 Issue 6

16th April 2014 Issue 2

1st Sept 2014 Issue 9

16th Jun 2014 Issue 5

1st April 2014 Issue 1


LETTER FROM THE MANAGING DIRECTORWe began our GZ journey with high aspirations of providing cutting-edge

research backed by meaningful on-the-ground insights and views. It has

been an exciting journey as we traced the launch strategy of Reliance Jio

in Ahmadabad and went delving into the cyber world of online retailing, to

analysing Mumbai’s infrastructure, to a bumpy ride with fleet operators and

various other such prodigious expeditions.

But this is just the beginning and the vastness of India keeps pushing our

frontiers to explore new territories. The support and encouragement that we

received from our readers has been very inspiring and it has convinced us to

further our efforts in this direction. After publishing twelve ground-breaking

issues, we present the “Annual Collector’s edition of Ground View” magazine.

The annual edition is the summation of our worldview deliberated from on-the-

ground insights and take on the key developments across various sectors.

It has been an exciting year for India but a tumultuous one globally. The world

is not as nice as it was a year back but India looks definitely better placed. We

have a single party majority government after thirty years when Rajiv Gandhi

came to power in 1984 with an unprecedented majority and vote share. Then

came the era of coalition politics and an in-between period of high economic

growth driven by investment cycle, technology diffusion and rise in consum-

erism, but never a sustained cycle like the industrial revolution era in the west

or the more than 20 years industrial cycles of Japan, China or South Korea.

We are keeping our fingers crossed that the Modi government will achieve a

lot in terms of development in its tenure.

2015 Swachh Bharat - A year of India Cleansing, penned by editors

Naveen Kulkarni and Kinshuk Bharti Tiwari focuses on the need for reforms

and transparent policies, which will provide visibility for consistent multi-year

growth. PM Modi has achieved it in Gujarat as CM and is adopting the model

at the centre. The patience of investors and people will be tested but the

wait will be worthwhile.

Also read in this issue in-depth coverage on the shortcomings and develop-

ments of the Indian logistics sector and a freewheeling interview with alpha

banker, Deepak Parekh, as he discusses the state of the Indian economy.

Wishing everybody a very happy and prosperous new year!

Best Regards,

Vineet


7. Swachh Bharat - 2015: A year of India cleansing / By Naveen Kulkarni & Kinshuk Bharti Tiwari

21. Event Calendar for 2015

22. 2014: A year in charts / By Varun Kumar

27. Interview – Deepak Parekh / By Manish Agarwalla

CONTENTS

2015EVENTS

30. IN-DEPTH : Who moved my “cargo”? – Opportunities in a modal shift for Indian Logistics / By Vikram Suryavanshi

55. Telecom - Jio: Yet to find its VOICE / By Naveen Kulkarni

59. Metals - Adapt or Perish – The future of secondary steel producers in India / By Dhawal Doshi

61. Retailing - When South meets North - The Bangle is yet to fit / By Abhishek Ranganathan


63. Infrastructure - Maximum City – Minimum Infra / By Vibhor Singhal

65. Banking - Banking at the bottom of the Pyramid / By Manish Agarwalla

66. Engineering - Set to capitalise on growth opportunity!! / By Ankur Sharma

67. Agri Inputs - Crops await modi-fication

By Gauri Anand

CONTENTS

72. Pharmaceuticals - Oncology offers the biggest global opportunity / By Surya Patra

75. GST - A fine balance / By Anjali Verma

80. Cement - A reality check on Indian cement / By Vaibhav Agarwal


BY NAVEEN KULKARNI & KINSHUK BHARTI TIWARI

COVER STORY

India now has a progressive government with a

clear mandate of development. Under the strong

leadership of PM Narendra Modi, India will progress

and enjoy a disproportionate share of the total

global fund allocation. PM Modi’s agenda is not just

one of development, but also of sustainable multi-

year growth. He cannot achieve this unless India

changes the way it does business — i.e., devoid of

graft and machinations. A lot of system cleansing

has to ensue and 2015 will be a year dominated by

policy reforms that will lead to transparent systems

and processes and provide long-term visibility for

businesspersons to commit serious capital.


A world in transition; advantage Asia

It is now safe to say that the world will grow faster in

2015 than 2014, led by America. But this will not end

the problems of the West. The dangers of EU slipping

into recession and deflation are more apparent than

ever. Meanwhile Russia, with a 40% depreciation of the

Rouble, harks back to the late 90s situation. America and

Britain are moving towards a regime of higher interest

rates while EU and Japan are doing the opposite, i.e.,

putting out even more monetary stimulus. Russia contin-

ues to confound everybody. This is the state of the world

economy.

US GDP and world GDP growth; Russian Rouble

Russian Rouble saw historic lows in December 2014

Leadership of the west?

The problems of the West — lack of strong leader-

ship and public disenchantment — are on the rise. In

the United States, even with a reasonable recovery in

place, voters vented their fury in 2014 midterm polls

— turnout was low and anti-incumbency was extremely

apparent with the Republican Party posting sweeping

gains. People in Britain, Spain, and Canada will surely

express their frustration through their votes in 2015.

The most successful party of UK, the Conservative

Party, will fight the May elections with just around

134,000 members —dismal compared to 3mn mem-

bers in the 1950s. Populists such as the ex-Refco trader

Nigel Farage of the UK Independence Party, known for

his fiery but often controversial speeches in the British

parliament, may benefit from this situation. In France,

Francois Hollande’s approval ratings have plummeted

to mere 12% and could trend further downwards in

2015 — a record low for any French president. Germa-

ny, Europe’s largest economy, is on the brink of a reces-

sion because of a government too obsessed with fiscal

targets and too scared of its voters after the disastrous

fate of Gerhard Schroder’s reforms (Agenda 2010,

implemented from 2003).

Global themes dominated by US and politics

The strengthening Dollar, impact of falling commodity

prices, and an increasingly uncertain global political

scenario will be the three major global themes for

2015. Global financial markets will remain volatile, as

the highly intertwined currency, commodity, and equity

markets will be cheerful and spooked at the same time.

However, Asia seems to be a better place with a

stronger political fabric, and, more importantly, strong-

er leaders that even inspire the West. Whether it is

our own Narendra Modi, Jokowi in Indonesia, Abe of

Japan, or Jinping in China, Asia will have a stable politi-

cal environment and will grow faster than the West.

While China is slowing, it is still the fastest-growing

major economy; India’s growth rate is set to improve

with falling inflation, rising consumption, and a step

up in government spending. With improving growth

that looks sustainable, India will continue to attract

disproportionate allocation, which will keep the Indian

financial markets buoyed.

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PM Modi- A time to keep promises

One thing that almost each Indian worries about

is the security and health of PM Narendra Modi,

because so much of India’s future depends on him.

His impact on the financial markets, the bureau-

cratic system, and the confidence of the business

community is unprecedented. PM Modi works like

a machine and his popularity at a global level is

unlike any of his predecessors. Relations with the

US seem to be improving with president Barrack

Obama accepting the invitation to attend 26th

January 2015 Republic Day celebrations in India.

He has instilled confidence around the world that

India is a worthwhile destination for investment.

All this is very good, but the mandate of the

people is one of development and development

alone. PM Modi is lucky that crude, which ac-

counts for 35% of India’s imports, has corrected

by 45% and is helping tame inflation. Inflation will

lower in percentage terms but on absolute levels,

the essential-commodity prices are still uncom-

fortably high, courtesy the high base of 2013. This

is a perilous state, and will continue to inhibit a

significant rise in disposable incomes. However,

with increase in wages, decline in interest rates,

and improving consumer sentiments, consumption

growth will pick up and help economic growth.

However, this is not enough to resurrect the Indian

economy.

More, much more is needed and faster

More reforms, more investments, more private

participation, more jobs…the Indian economy

needs so much more. The biggest challenge

before the Modi government is to kick-start the

investment cycle. Until now, the improvement

has been tardy. Economists and strategists alike

contend that if India gets an investment cycle that

is similar to 2004-2009, most of its economic prob-

lems will be solved. This is a real challenge and a

difficult one. Most of the lead economic indica-

tors for the investment cycle, such as Gross Fixed

Capital Formation, show sluggishness. A pick up

in Gross Fixed Capital Formation depends upon

higher entrepreneurial activity, increase in risk ap-

Consumer price index falling

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It all starts with coal

Mr V.N. Paradkar, a leading infrastructure consultant,

says that the power sector is the most critical part

of India’s infrastructure. “Many projects are stuck for

the want of coal. Government’s first and foremost

target will be to revive this sector and then others

will follow,” he believes. Coal-sector reforms have

been pending for quite a while and the kick starting

of reforms in this sector will breathe life into the

asphyxiated power sector and help the banking

and capital goods sectors as well. In February 2015,

the government will auction 101 coal blocks out of

the cancelled 202 blocks; it has reserved 63 blocks

(of the 101) for the power sector. Most of the coal

blocks are for existing projects, but in the next round

of auctions, blocks for new projects will be up for

grabs. Power sector accounts for the biggest share

of stalled projects (around Rs 7.6tn). Stalled projects

worth Rs 650bn could start after the first round of

auctions but they represent only a tiny fraction of the

total. Coal auctions will not solve the problems of all

the stalled projects as many are embroiled in local

issues, which the central government cannot resolve.

However, the endeavour of the central government

will be to provide transparent policies that provide

businesspersons with long-term visibility for doing

business.

Gross Fixed Capital Formation growth sluggish

petite, and lower interest rates. Most of these can be linked

to the quality of governance and innovative policymaking.

2014 was a year of state elections and BJP has ensconced

itself as the clear winner. The year 2015 will be the year of

reforms and cleansing. Fringe issues have impacted the

parliamentary functioning and the government has opted for

the ordinance route for passing critical bills on insurance- and

coal-sector reforms. It is now safe to say that the reforms have

started, but from here, their pace will be more important.

Consumption Growth to pickup

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Stalled projects still growing

Breakup of stalled projects

Reasons for stalled projects - not just fuel

EC: Environtmental clearance FC: Forest Clearance

Sectors FY10 FY11 FY12 FY13 FY14 Q115 Q215

Industrial projects 360 241 196 305 118 14 22

Infra & Misc. projects & CRZ 83 88 74 150 60 54 18

Thermal projects 60 63 51 34 8 3 7

Coal mining 56 36 22 41 34 3 12

Mining projects 93 87 46 34 73 4 9

New constr. projects & Industrial estates 63 40 27 37 11 1 1

River valley & Hydroelectric projects 15 8 5 3 5 0 0

Nuclear projects 1 1 3 1 0 0

Grand Total 731 564 421 607 310 79 69

Environmental clearances given by sector: Source: MOEF website

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The Fearsome Foursome

According to the World Bank, India is ranked a dismal

134 out of 189 on ease of doing business. PM Modi’s

vision is to get India into the top-50. This is an ambitious

target considering India’s opaque ways of doing business

coupled with complicated tax structure and archaic labour

laws. After Modi coming to power, a lot of changes are

taking place in the way of central government is func-

tioning. “Woh din gaye jab industrialists’ parliament ke

seat sponsor karake projects approve karate the (those

days are gone when industrialists used to get projects

approved by sponsoring MPs election campaigns,”

says a central government joint secretary not wishing to

be named. “PM Modi, BJP party president Amit Shah,

Finance minister Arun Jaitley and Power minister Piyush

Goel are the top-4 keys to the government functioning,”

says another top bureaucrat. A significant number of pol-

icy related decisions are completely controlled by the top

4. The Prime Minister’s Office is an all-powerful unit and it

has almost replicated the Gujarat model at the centre. Bu-

reaucracy taking charge is a good thing, but if this is not

backed by required systems, processes that cut through

red-tapism, not much will be achieved. At the bureau-

cratic level, the current focus is not so much on launching

and approving new projects, but rather on getting the

requisite business-friendly policies in place such as GST,

labour reforms, and land acquisition among others.

A year of cleansing and reforms; budget touted to be the

game changer

To say expectations are running high would be an under-

statement. However, the very same people who expect a lot

from the new government are not ready to change them-

selves yet. The road to reforms will certainly not be smooth.

To give an example, PM Modi launched the Swachh Bharat

campaign on 2nd October, but the results are not yet visible

because it requires a massive change in the mind set of the

people of India. Also, for participation in a cleaner structure,

enormous systems need to be firmly in place. This applies to

sustainable development as well. India has a huge number

of stalled projects, which have plagued the banking system.

This can be attributed to faulty policies and inadequate

checks. Emphasis on execution, transparency of policies, sim-

plified tax, and legal structures provides long-term visibility

for ethical and high-quality entrepreneurs to commit capital.

As private investments pick up, gross capital formation rises

rapidly and growth ensues. Achieving all this will take a while

as framing the right policies is time consuming and even after

best efforts, they may be far from perfect in a complicated

socio-political economy such as India (read article on GST

implementation) even when well-established global exam-

ples available.

“Abhi mantriyon ko bhi salary se kaam chalana padega; na

khud khata hai na khane dega aur kabhi bhi kidhar bhi aa

jaata hai (ministers will have to be satisfied with their salaries;


Modi is incorruptible and will not allow anybody to take bribes. He frequently makes unannounced visits to any department),” says a political broker working in New Delhi while he complains of the lack of work in the new government for political brokers. “Abhi toh kuch aur kaam sikhna padega (we will have to learn a new trade now),” he adds dolefully. Weeding out corrupt practices that affect the common person is another big challenge and Modi is personally keeping tight control over all the ministries.

Going by the state of things at the bureaucratic level, the focus is on getting more policies in place that ensure long-term sustainability of growth. Even though there is evidence that the bureaucratic machinery is working at a frenzied pace, this may not translate into too much growth in 2015. However, there will be policy announce-ments galore and government spending will pick up.

All eyes on the upcoming budget

One of the key mediums for the government’s policy an-nouncements will be its first full-year budget in February 2015. A lot of work is being put into innovative policy announcements. Some are basic necessities like GST. Announcements on direct tax code, labor and irrigation

reforms will be positive.

India Equities: A balancing act

2015 will be an investors’ market, but not so much for traders. The biggest themes for the Indian equities are:

• Government reforms, lowering of interest rates, and a pick up in government spending

• Lower crude prices, translating to lower inflation, savings, and consumption growth

• Strong Dollar, which will provide a fillip to exports

• In the uncertain global environment, one piece of very bad news will hurt the markets. There are lots of issues to be worried about (ISIS, Ebola, sovereign defaults contagion effect). One such issue will lead to an episode of flight of capital.

A Swachh Bharat for banks too

PM Modi met bankers on January 3rd 2015 in Pune to discuss the issues such as capital requirements, risk profiling, debt recovery, and restructuring of public sector banks to improve their efficiency. This was a first-of-its-kind meeting and finance minister Arun Jaitley, minister of state for finance, Jayant Sinha, and RBI Governor

Dr Raghuram Rajan attended. The final objective for such meets will be to prepare a blueprint of the reform action plan, which the banks and the government can then put into action. Lending activity has to rise for the investment cycle to pick up. However, banks do not want to take risks because of the huge burden of toxic assets in their books, especially the public-sector banks. The government will have to help the public-sector banks to manage their toxic assets through policy decisions such as coal sector reforms, which will help banks recover some assets and aid performance. Still, a lot of work has to be done to get the banking sector back into the traction of 2005-2008.

The good news is that the Non-Performing Assets (NPA) cycle

should peak by March and start declining thereafter, albeit at

a sluggish pace. Interest rates could trend lower by March.

Non performing assets peaking

Credit growth to pickup

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SBI base rateThe credit growth in 2015, estimated at 14% yoy, is markedly

better than the 2014’s growth of 11%. Also considering that

this growth is without the oil-marketing companies’ borrow-

ings indicates that the development is constructive. With

rising volumes and falling NPAs, the mood for the banking

sector will be buoyant in 2015.

CYCLICALS WILL NEED MUCH MORE

Early cyclicals to see revival activity

Indian cyclicals include oil and gas, cement, industrials, metals and infrastructure. Early cyclicals in a capex cycle include cement and metals. Demand revival in cement is still more of a hope than reality. However, with rising government spending in sectors such as transportation, the cement sector should see a reasonable pick up. The metals sector is embroiled in several legal issues pertain-ing to mining. Some of these issues will be sorted in the near term and companies will start benefitting.

Industrial sector expectations lack pragmatism

Considering the pace at which ministries are clearing projects, and the pace of announcement of new projects, it seems unlikely that private participation will be significant in 2015. Private companies are still struggling to get their stalled projects back on track. Expecting participation from private players to kick start an investment cycle seems farfetched. Ordering activity will be tepid in 2015, but policy announcements will keep partici-pants interested, as new avenues for growth start opening up. The government, which has set ambitious targets in transporta-tion and power, is likely to dominate investment activity. Also, state-government participation is likely to improve. However much investment improves in 2015, it is not likely to even come close to the investment activity seen in 2005-2008. On-the-ground feedback and checks do not back the financial market’s expectation of significant private participation.

It is survival of the fittest in EPC

“I have enough manpower capacity already at my disposal and don’t see the point of buying another EPC player,” says Mad-hur Shah, promoter of a midsized EPC company, when quizzed about an acquisition opportunity. Quite a few EPC players are looking to exit their businesses as higher interest rates and margin squeeze by larger companies has impacted their balance sheets, with limited scope for revival. Companies with good pre-qualification credentials are languishing for several reasons such as cost of funds, labour costs, and project pipeline. Survivors in the category will the beneficiaries. Going by the commentary of the midsized players, ordering activity (that impacts the indus-try) seems to be some time away and the system has sufficient capacity to inhibit the profitability of even the large players at present.

G-Sec 10-year yield

New projects still sluggish

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FII inflow vs Nifty annual return

Axis Bank: A proxy play to the credit growth cycle. Resolution

of stalled projects and uptick in credit cycle will allay as-

set-quality concerns and provide a fillip to fee income. Strong

retail franchisee will give earnings stability and an increase in

the credit cycle will provide traction to its bottom line.

State Bank of India: Adequate capital, lowest cost fund-

ing, and wide reach puts SBI in a sweet spot. Re-pricing

of fee charges and contained opex will add to operating

profitability. This, along with concerted effort on improving

asset quality will reduce credit cost and aid return ratios.

Axis Bank State Bank of India

F I N A N C I A L S Most interesting companies to watch out for in 2015

Bring out the shields: Defensives back in flavour

Inflows from foreign institutional investors dominate the Indian financial markets. Even with very limited outflows, the Indian stock markets undergo very sharp corrections. Strong US growth, rate cut in India, rate hike in the US, and fear of contagion will result in one episode of flight of capital in 2015. In this situation, high-beta stocks/sectors, driven by announce-ments and ‘hope’ will correct sharply and give up a significant portion of their gains. Defensives will perform and provide portfolio stability. Indian defensives include consumer, IT, and pharmaceuticals. These sectors will gain importance in 2015 as the export-based pharmaceuticals and IT are dominated by the global overarching theme of dollar appreciation, while the consumer sector is helped by a decline in crude prices and rise in discretionary spending.

Consumer-discretionary categories like paints, jewellery, appar-el, retail, and personal care will see uptick in value growth.

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LIC Housing Finance Ltd

LIC Housing Finance Ltd: The demand-supply gap in housing

and the government’s thrust on low-cost housing provides am-

ple growth opportunity. Well poised to register stable business

growth, deliver healthier spreads driven by refinance gain on

liability side as well as gain because of asset mix change, and

demonstrate superior asset quality. This will result in strong

earnings visibility and superior return ratios.

C Y C L I C A L S Most interesting companies to watch out for in 2015

Ultratech volume vs. industry volume growth

UltraTech: The largest cement company in India, with a produc-tion capacity of around 68mn MT per annum. It will be the only cement company among the major players to consistently deliver high double-digit volume growth because of its aggressive capac-ity expansions in the last few years. Inorganic growth strategy will help in gaining market share across regions.

Sesa Sterlite: Sesa Sterlite should be one of the biggest ben-eficiaries of the changing regulatory scenario in India — it will benefit from policy reforms in coal, iron ore, and bauxite. One of the largest coal users in India, it will aggressively participate in the upcoming coal-block auctions, which will help secure supplies for its various CPPs and IPPs across India. Speedy approvals for

Zinc

Raykal bauxite mines will help secure raw materials for its alumin-ium operations in Orissa and Chhattisgarh. In addition to Raykal mines, Sesa Sterlite has received PLs for three laterite deposits, which can partially meet its short-term bauxite requirements. Securing of bauxite and coal supplies will help ramp up Sesa’s power and aluminium operations (currently operating at very low utilisations), thereby driving value. It has started sweating unutilised capacities using external raw-material supplies on a relatively lower scale. Allocation of resources (coal blocks, mines) can lead to a meaningful jump in utilisations. Medium term, strong outlook on zinc prices led by demand-supply mismatch will significantly drive its profitability.

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Maruti Suzuki

C O N S U M E R D I S C R E T I O N A R Y Most interesting companies to watch out for in 2015

Maruti Suzuki: Its domestic-passenger-vehicle growth

rate will continue due to favourable model cycle

and filling up portfolio white spaces. It successfully

launched Celerio and Ciaz in 2014 and intends to

launch its crossover (entry SUV) and premium hatch-

back (competitor to i-20), which will help gain volumes

from new segments. Maruti’s volume growth will be

about 20% in both FY16 and FY17, based on new

launches and demand revival. New segments such as

mid-size sedan, crossover, and premium hatchback will

have very low cannibalisation with existing models.

A 20% Yen depreciation in the last few months will

improve margins by 180-200bps, but positive surprises

are likely here.

Alstom order book and EBITDA margin

Alstom India: Alstom India provides a fine balance between a

pick up in domestic ordering activity and export growth. Ordering

activity from the state utilities will pick up in 2015. Exports account

for almost 40% of Alstom’s revenues and growth in this segment

will lead to operating leverage gains. Backed by strong revenue

growth and margin gains, Alstom will be one of the top creators in

the industrials sector.

Adani Ports and SEZ: Diversified portfolio of eight ports across

the country, with Mundra Port being its crown jewel, Adani should

report robust cargo CAGR of over 20% in FY15-16. As a virtual

Adani Ports and SEZ

monopoly in the port development and operations space, it will

benefit from a surge in order-awards for capacity expansion at various

ports in India over the next 3 years.

Nagarjuna Construction: Nagarjuna has not only survived tough

times, but it has emerged stronger. It will benefit from the ‘trinity’ of in-

creased order awards, declining competition, and lower interest rates.

Deleveraging of balance sheet – aided by lower interest rates, ratings

upgrade, asset divestment, and better working-cycle management –

will help the company deliver manifold earnings growth (168% CAGR

over FY14-16).

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HUL volume and earnings growth

Hindustan Unilever: Volume growth will pick up sharply in 2015 on promotional activity in two largest categories — detergents and soaps — as it passes on benefits of decline in raw material prices. However, value growth will pick up with an increase in discretionary spending in the person-al-care category. The highly inflation-sensitive products such as Fair & Lovely and masstige products including Ponds’ skin-care range will see significant pickup in the sec-ond half of 2015. Hindustan Unilever will not only deliver volumes but also strong value growth in 2015.

Trent: A rapidly improving, own-label departmental-store

(Westside) model, best-placed among offline players in

terms of competition from ecommerce. The departmental

store has begun seeing benefits of operating leverage as

like-to-like sales improves on product revamp and design

quotient (similar to Zara – at significantly lower prices).

There is more juice in the store as more categories are

revamped, resulting in better footfalls, conversions, and

hence LTL. It will also be a part of the Tata ecommerce

platform and will be able to extend Westside’s and Zara’s

reach. LTL growth drivers: Initiatives on supply-chain (stores

operate at 80% availability), rejuvenated merchandise,

focus on fashion quotient, and adding new lines have

resulted in improved ticket sizes. These initiatives have re-

sulted in improving gross margins and unlocking operating

leverage of the Westside format.

Titan Industries: Operating performance set to improve substan-tially based on various factors. More store space entering maturity phase will translate to better sales density and more operating lev-erage. Its state-of-the-art unique supply-chain management system will give its balance sheet the flexibility to adjust to various scenar-ios of consumer behaviour. Competitive intensity is not as high as perceived and in terms of number of stores and reach, Titan is way ahead of its organised competition. Two factors impacted Titan’s revenue per sq. ft. over FY13 and FY14 — new space addition and a slowdown in demand (2% grammage fall over FY12-14 due to poor consumer sentiments). In fact, LTL sales sq. ft. is at its lowest in the last four years. Rising LTL space will drive the sales.

Titan area vs. sales/sq ft

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E X P O R T B A S E D Most interesting companies to watch out for in 2015

Export-based defensive plays: All the large Indian IT companies (Infosys, TCS, Wipro, HCL Tech, and TechM) derive more than 50% of their revenues from the US and improving growth prospects from that country will help all IT companies. Infosys and Wipro will be most impacted by rising discretionary spend-ing in the US, which also the largest market for Indian pharmaceutical majors. Sun Pharmaceu-ticals has the largest revenue exposure (60%) while most export-focused Indian pharma companies get 40%+ revenues from the US.

Tech Mahindra: TechM’s recent acquisition of Lightbridge

Communications has raised the entry barrier in the telecom

space for its peers. This move, along with its strategy of

bundling its communications and networking services with

enterprise solutions, should pay rich dividends. Retail and

manufacturing (Satyam’s strengths) will drive the next leg of

growth. Its enhanced capability has significantly improved

the visibility of its growth prospects and hence the value of

its business.

Tech Mahindra

Dr Reddy US product pipeline

DRL: Sustained healthy growth in US business

Dr Reddy’s: The US accounts for 44% of its revenues.

It has a robust US pipeline with strong revenue visibility

led by recent limited-competition drug launches such

as gSirolimus (US$ 200mn opportunity), gValcyte (US$

440mn), gXopenex (US$ 270mn) among others. Another

8-10 drug launches are likely in H2FY15 in the US, provid-

ing further impetus. Stepped-up R&D initiatives towards

complex and differentiated generics will help sustain

value growth.

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Tata Motors: Tata Motors’ key subsidiary, JLR, will deliver

volume-led growth driven by both capacity expansion (China

plant and UK capacity augmentation) and significant new

launches such as Jaguar XE and Discovery Sports. JLR vol-

umes could reach 750,000 units by FY17 from 500,000 units

in FY15. Its margins and free-cash flow, too, will be strong

because of higher volume from early-cycle and non-discount-

ed models along with superior geographical mix. A turna-

round in the domestic business (late 2015) that is driven by a

volume pick up in M&HCVs and recovery in LCVs will further

aid growth prospects.

Tata Motors: Jaguar and Land Rover Tata Comm enterprise EBIDTA growth and contribution

Tata Communications: Tata Communications has sig-

nificantly enhanced its capability and product offering

for enterprises over the last few years. Its position on

Gartner’s magic quadrant has consistently improved.

Rising contribution of enterprise services from the inter-

national markets coupled with curtailing of losses in new

product launches will translate into margin expansion.

Since it has reduced debt after selling Neotel, it has

more options to manage its P&L. More options mean

better growth prospects and higher business value.

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JUNEOnset of Monsoon in the western part of IndiaPhillipCapital Ground View ConferenceG8 summit (G7 Putin is not invited) at Schloss Elmau in Bavarian Alps hosted by German Chancellor Angela MerkelTurkey holds a general election

JULYLuxembourg takes over the EU’s presidencyNew Horizon, a NASA space probe launched in 2006, becomes the first to visit Pluto

AUGUSTIndia Celebrates 68 years of Independence on 15th AugustThe World Championship in Athletics will be held in Beijing

SEPTEMBERIndia Celebrates Ganesh Chaturthi on 17thIndia Celebrates Bakri ID on 25th

OCTOBERBihar State Assembly ElectionsIndia Celebrates Dussehra on 22ndCanada General ElectionsJames Bond Film, 24th in the series starring Daniel Craig is released

NOVEMBERIndia Celebrates the festival of lights, Diwali, on 11th and 12thTurkey hosts the tenth G20 summitLeaders of the 21-member Asia Pacific Economic Co-opera-tion assemble in Manila, PhillipinesInternational conference on climate change is held in Paris

DECEMBERSpain to hold general electionWorld Celebrates Christmas on 25th

JANUARYPM Modi, finance minister Arun Jaitley, MoS for Finance Jayant Sinha, and RBI Governor Dr Raghuram Rajan met bankers in Pune.11-13th: Vibrant Gujarat Summit

Barrack Obama attends 26th January Republic Day celebra-tion in New Delhi.23rd Jan: PhillipCapital India CEO ConclaveLithuania joins EuroLatvia starts its first six-month stint as EU’s president

FEBRUARY: Action packed month

RBI Monetary policy on 3rd

11th Cricket world cup (to be jointly hosted by Australia and New Zealand) starts from 14th

General Elections will be held in Nigeria on 14th

Chinese new year Day on 19th - Year of the GoatTelecom spectrum auctions in 800MHz, 900MHz, 1800MHz, and 2100MHz band - the biggest spectrum auction in India starts on 23rd101 coal blocks of 202 cancelled coal blocks go for auctionBudget for FY16 - Touted to be a game changerDelhi State Assembly elections

MARCHCategory-C iron ore mine auctions

Cricket World Cup Final at Melbourne Cricket Ground on 29th PhillipCapital regional conference in Singapore

APRIL Start of new fiscal year 2015-2016

Indian Premier League Season 8 to starts from the 8th

Seventh Summit of the Americas, a gathering of leaders from across the region in Panama

MAYUnited Kingdom general elections for its 56th Parliament

Modi government completes one year

Expo 2015 opens in Milan

EV

EN

TS 2015


2014 - a year in charts

Indian markets in 2014 were a reflection of two men who have been working very hard to solve

the structural problems that ailed the Indian economy and the markets. The year 2014 for the

Indian markets belong to these two distinguished leaders and we might as well stop this article

at this point. While the bigger picture is captured with these two images, allow us to narrate

the story of the year 2014 for the Indian markets. Here’s how the year looked for the Nifty

NIFTY

BY VARUN KUMAR

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A splendid year indeed! But it was unexpected as the Indian economy was

battling with problems at many fronts. Besides the

well-known slowdown, who can forget the rupee

scare last year when in a matter of weeks, USD/

INR went from 54 to 68 and commentators were

writing about this touching 70 and beyond. Infla-

tion was raging, CAD was widening, and in these

tumultuous times, Dr Rajan took charge at the RBI.

The year 2014 has been amazing on both fronts

that he battled — CAD and CPI.

Of course, this was helped by the spectacular

crash in oil and the general commodity complex

CPI

Current Account Balance

Bloomberg Commodity Index

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The good thing about markets is that it hands

out report cards pretty fast. Dr Rajan’s and the

government’s work on inflation and external

account showed results over the course of

2014. Their outstanding performance was

rewarded well by falling yields on both gov-

ernment and corporate debt over the course

of the year.

Corp AAA

While the GDP rose from its bottom in 2014,

some part of this was cyclical. However, the big-

ger part, the forward-looking part, the part that

deals with hope and animal spirits — that script

was written in the electoral battle earlier this

year. That part is the story of another man that

towered over the Indian political and economic

system in the year 2014.

GDP rose from its bottom in

the second half of 2014 as well

G10 Year

GDP YoY

3 4

GDP

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As can be seen, rising economic policy uncertainty in India, much touted as “policy paral-

ysis” in popular media, has had severe impact on GFCF, PFCE, growth and hence on the

entire economy. This political uncertainty also impacts Total Factor Productivity, which IMF

also cited as a key problem for India between 2011-13. As can be seen in the chart below,

the biggest slowdown contribution to growth came from a drop in TFP, which came from

political uncertainty, which in turn locked capital in stuck projects

The year 2014 saw the demise of

this demon of Uncertainty in the

Indian political scene — the man-

date for PM Modi is the largest in

the last 30 years. For all political

pundits that thought that India is

bound for coalition politics, this

picture destroys all the myth. To

end the review of 2014, we would

quote the next picture because

the future of the next 5 years will

be written on this bedrock.

Total factor productivity

Source: IMF

Source: Authors of second paper

Time series of key economic indicators for India

5

6


While “Policy Paralysis” was a fashionable phrase for the whole of 2013, few people understood the consequences of political uncertainty on the broader economy. This chart from an academic paper brilliantly captures the impact of political uncertainty on the economy If we were to pick just one picture, without any words to capture the

year 2014 in the Indian economic, political, and markets spheres, it would be this:

7


We met up with Mr Deepak Parekh, Chairman of HDFC, and a great stalwart of the Indian finance industry. Our discussion covered various topics ranging from progress made by the new government, centre-state relationship, infrastructure development, investment cycle, and licensing of new banks. The discussion suggests that the move and direction of the present government is absolutely in the right direction. Given the steep moderation in GDP growth and spiralling inflation in the recent past, the recovery would be very gradual.

BY MANISH AGARWALLA & SIDHARTH AGRAWAL

DEEPAK PAREKH on everything: 2015 and beyond

««


Q: The government has given a lot of emphasis to

issues such as elimination of corruption, improvement

in transparency, and faster clearance of the projects.

Do you see any progress on these fronts?

Corruption is endemic in India. The present government

is trying to handle large big-ticket corruption, which

comes through the tendering exercise. All the central

government contracts above a certain value will be done

through transparent internet-based platforms from 1st of

April 2015. Once the centre does it, the next step will be

for the state governments to implement. It will take time

as IT infrastructure needs to be put in place. A similar

IT-based platform can be used for tendering key imports

such as defence equipment. This, to a large extent, will

help in cleaning the system and help the government

exchequers. However, this will not help the day-to-day

(small-ticket) corruption, which is a separate item, and

will take time to clean up.

The government is also laying emphasis on the ease of

doing business by consolidating many of the approvals/

permissions needed. For example, the Maharashtra

government is even ready to provide a chaperone

(government employee) to anyone who intends to put

up industries in Maharashtra in order to ensure smooth

approval process. This will set an example for other

states to follow. I think we are going absolutely in the

right direction. We need to have patience and it will take

time for material results.

Q: Is the centre-state relationship improving?

The government is putting a lot of emphasis on state, as

they know development happens in the state and not at

the centre. It’s unprecedented that the prime minister is

spending enormous amounts of time with the state chief

ministers. Similarly, other central government ministers

are meeting respective heads at the state level — like

the finance minister meeting with state finance min-

isters, home minister meeting respective state home

ministers, etc. The intentions are laudable and there is a

huge change in the centre and state relation in the last

6 months. It’s a great achievement for the honourable

prime minister.

Q: How can the ambitious infrastructure investment

pick up in India?

The infrastructure investment target, which has been

scaled down from Rs51.46trn to Rs30.9trn, may still not

be achievable. New investment in power, roads, etc., have

dried up in the last few years. The companies in infrastruc-

ture are over leveraged so deleveraging has to take place.

Many of the projects are stuck on the last mile due to lack

of raw material. Also, contracting firms (EPC players) are

over leveraged. We have a shortage of contracting firms.

These have lots of receivables that are under dispute and

are subjected to arbitration, which takes years in India. The

balance sheets of these companies are stretched. No one

wants to lend money to infrastructure-contracting com-

panies because they do not get paid on time, schedule

of construction gets dragged on, and the parties which

give them the contracts get over leveraged. We need

to strengthen the contracting firms. Part of infrastructure

such as logistics, warehousing, and airports are doing well

and investors are ready to put money there due to quick

turnaround time.

Q: Do you think the coal auction will increase the input

costs for power producers and eventually make power

costly in India?

International coal prices are down by 45% against all

expectations. Bidders will be cautious when they bid for

coal mines. Coal is not a scarce commodity today. Despite

taxes and duties, the imported coal is very much afforda-

ble. Having said that, the auction route is also fraught with

problems. Unwanted competition and rivalry may make

prices of the asset costly.

Q: Do you think that the entire loan restructuring by

banks was done in a good spirit?

Loan restructuring was a learning for banks. The amount

of restructuring has become very large. It should have

been rescheduled rather than restructured. Lot of power

projects are ready, but not working due to lack of raw ma-

terials, and hence restructured. If the banks have provided

loans without government assurance for raw material, then

the loan should have been restructured. If the banks have

provided loans based on government assurance to provide


raw material and the government has failed to do so, then

the loan should have been rescheduled, not restructured.

The loan should have been rescheduled before restructur-

ing.

Q: When do you see a pick up in the investment cycle?

Firstly, there is overcapacity in the system, so demand

needs to improve before fresh capacity addition. Second-

ly, ease of doing business has to improve for new capex.

Thirdly, existing plants under construction need to see

completion before new investment comes on the ground.

It’s not going to be easy for the capital cycle to start imme-

diately.

Q: The government’s ‘Housing for all by 2022’ scheme

— what are the key challenges in implementing it?

What kind of opportunity do you envisage for hous-

ing-finance companies?

Affordable housing is an area that the government wants

to concentrate on. Housing in urban areas at affordable

prices is not possible due to high cost of land, unless

there is cross subsidy or state intervention pertaining to

land. Slum Area Rehabilitation Authority has been able

to remove certain slums and provide affordable housing

because of huge FSI. So housing for all by 2022 is possible

if state governments do something to make land available

at affordable prices. There are various ways to address the

issue of affordable housing in urban areas such as rental

housing (government gets annuity income over longer

periods of time), providing higher FSI for the afforda-

ble segment, single-window approval for developers in

affordable segments, etc. Housing as a percentage of GDP,

which was 2% in 2000 has grown to 9% now and will reach

20% of GDP by 2020.

Q: With new universal banking licenses, niche banking

licenses, and declining regulatory arbitrage between

NBFCs and banks, do you see risk to the business mod-

el of NBFCs in the present form?

Our regulators have been uncomfortable with the NBFC

sector. In China, the biggest issue is that 25% of its finan-

cial sector is unregulated informal banking or what is called

shadow banking . RBI does not want to get into that stage

and is trying to encourage institutions to come under vari-

ous bank models such as universal bank, niche bank, small

bank, payment bank, etc. The regulator wants more finance

companies to come under the ambit of supervision and

regulation. So they have made things difficult for NBFCs

by restricting new NFBCs (few years back) to raise public

deposits, bringing down the NPA recognition days to 90,

and no recourse to SARFAESI Act. NBFCs need to rethink

their model.

Q: What according to you will be the key success factor

for new banks?

It will be difficult for new banks to show results in a short

time. It was different starting a bank 20 years ago and now.

There is no first-mover advantage now such as what HDFC

group had when it started. The new banks need to find

their own niche areas, where they can do better. Maybe

non-fund based is an area where new banks can concen-

trate, like trade finance, distribution of financial products,

etc. The non-fund-based activity is less risky, consumes less

capital, and does not carry risk of ALM mismatch.

Q: Your thoughts on consolidation in the banking

space?

Consolidation in banks is useful, necessary, and it makes

banks more efficient. But we have not seen much consol-

idation because of union problems. We do not need so

many public-sector banks. We need some consolidation in

the public sector space, but we have not seen any because

of the union issue and disruption of management.


IN DEPTH

BY VIKRAM SURYAVANSHI

OPPORTUNITES IN A MODAL SHIFT FOR INDIAN LOGISTICS


Weeding out the inefficiencies in the supply chain across the

country, railways is likely to raise its market share in India’s

cargo movement (dominated by roads so far) with the proposed

development of Dedicated Freight Corridors (DFCs). It is beyond

doubt that India needs to overhaul its logistics sector to drive

its economic growth rather than opt for a mere incremental

change. The prevailing modal mix in the logistics sector cannot

support India’s growth story as high-cost road transport (at 60%)

dominates freight movement.

Apart from enhancing the market share of rail in freight to 50%

(current 32%), the focus on DFCs will also bring in efficient,

safe, economical, and environment-friendly options in cargo

movement. The proposed move should give a second chance to

private container rail operators to expand their business with a

level playing field. While it is proven that water is more efficient

and environment-friendly modes of transport, their contribution is

7% of total freight movement.

The development of an efficient rail system through DFCCs,

generation of cargo along an efficient network through DMICDC,

supported by implementation of an efficient tax system (GST)

is set to change investments, efficiency, and environment

in the supply-chain business. As the government optimally

integrates key transport modes with each other, cargo is set to

get reoriented. The shift from roads towards rail and water will

transform the way logistics is carried out in India.

pg. 32 The way India moves cargo India’s current cargo-movement scene – inefficient and costly___________________________________________pg.40 Modal shift - enabling sustainable growth The future of cargo in India: Railways, DFCs, DMICDC, and waterways___________________________________________pg.48 Moving towards global standard Containerisation: Lifting the trade___________________________________________


In India, logistics cost as a percentage of GDP is at 13% compared with

18% in China, 8.5% in USA, and 11% in Japan. However, China’s industry

contribution to GDP is at around 47% compared to 18% in India (so in that

context, its logistics costs are not high).

Although it is costly and inefficient over long distances, road transport

dominates freight movement in India. This is because capacity constraint is a

major issue for Indian railways. Railways share in overall cargo transport has

declined from 89% in 1951 to 32% due to lack of sufficient capacity addition.

India’s current cargo-movement scene — inefficient and costly

T H E W A Y I N D I A M O V E S C A R G O

• National highways 70,934km

• Coastline 7516 km

• Major ports 13

• Railway Route 64600km

• Road Network 4.4mn km

• Waterways 14,500 km nagigable

Modal mix in Indian cargo

Cost per tonne, per kilometre (Rs)

Indian logistics landcape

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Moving slowly: Roads dominate freight transport

The Indian logistics industry is valued at an estimated US$

130bn and it has seen a CAGR of over 16% over the last

five years. Aggregate freight traffic is estimated at about

2-2.3tn kilometres. Transportation costs in India have been

among the highest in the world, largely due to the inefficient

(yet predominant) road transportation. For decades, Indian

companies have had to compromise on this vis-a-vis their

foreign counterparts due to lack of choice. Unfortunately,

the rail-road mix in freight movement has developed rather

sub-optimally over the years, as railways consistently lost

out to roads, unable to install capacity or respond to market

needs.

In India, roads dominate the freight-transport mix

and constitute about 60% of total traffic. Rail and

coastal shipping account for about 32% and 7%,

while the share of inland waterways and air is less

than 1% each.

The Total Transport System Study (TTSS) carried

out by RITES for the Planning Commission cal-

culated that railways’ share in total inter-regional

freight traffic has progressively come down to 30%

in 2007-08 from 89% in 1951 and 65% in 1978-79.

India has the second-largest road network in the

world totalling 4.4mn kms, but most of it is of poor

quality. National Highways constitute only 1.7% of

the network, but carry as much as 40% of the road

freight. A significant part of the existing national

highways consists of single-lane roads, which have

suffered from prolonged neglect. RITES estimated

that this consistent and unchecked fall in the share

of railways through the years cost the Indian econ-

omy about Rs 385bn (16% of total transport cost).

The commodities that were historically moved by

% China USA India

Air 1 1 1

Water 30 14 7

Rail 47 48 32

Road 22 37 60

Freight transport in India: Dominated by Roads

“Truck capacity will get polarised towards high-capacity and light commercial vehicles (LCV). There will be a decline in the mid-range 14-18 tonne capacity trucks, as seen in developed countries, post implementation of GST,” said a consultant.


rail over long distances are now being moved by road. The

average freight traffic lead distance of roads has increased

over time, and railways have been affected by capacity

constraints. Road transportation provides last-mile con-

nectivity and is competitive up to 500kms when compared

to rail transport. However, it has been widely used to

carry heavy cargo over longer distance (i.e., greater than

500km) in India. The economic consequence is that roads

carry goods inefficiently. This adds to the cost and reduces

the competitiveness of exports. It also has environmental

consequences in terms of greenhouse gas emission and

energy usage that is higher than they necessary. Road

transport depends on imported fuel while railways use

mainly power generated from domestic coal — this results

in higher import dependency.

Indian trucking is an unorganised industry where around

75% of trucking firms own small fleets of less than five

trucks. Only 11% of trucking firms operate more than 20

trucks. “Shifted from own vehicles to lease and now

operate with 85-90% lease fleet. These are attached

vehicles on a trip basis. Driver shortage and poor con-

dition of roads is a major concern,” said a truck operator.

The industry is intensely competitive with low entry bar-

riers. Service quality, in terms of schedule and safety, are

not priorities. Truck transport is impacted by poor quality

of roads, which reduces speed to a third of that achieved

in developed countries. It is also impacted by multiple

checkpoints for inspection, payment of tolls and taxes,

and octroi. The World Bank estimated that truck delays at

checkpoints cost the Indian economy anywhere between

Rs9bn and Rs 23bn.

Indian Railways - no steam left

Indian Railways contribute significantly to the country’s mac-

ro-economic growth and global competitiveness, but account

for only 32% of the freight traffic. The Indian rail network is

the fourth largest after US, China, and Russia (however, these

countries are much larger than India). It is also the largest

passenger carrier in the world.

Capacity constraint is a major issue for railways. Its freight

performance has increased mainly because of over-utilisation

of its already saturated network. For instance, the high-den-

sity golden quadrilateral network and its diagonals, which

comprise only 16% of the total railway network, carry 65% of

total traffic. There are some sections where Indian railways

have been facing super saturation in line capacity. These

include Delhi–Howrah, Mumbai-Howrah, Delhi-Mumbai,

Delhi–Chennai, and Kharagpur-Chennai. Currently these

routes constitute 140-150% of capacity utilisation. Though

rail freight has increased in absolute terms, its overall share in

the country’s total domestic freight has reduced considerably.

The freight segment generates around 70% of the Indian

Railways’ revenue. Freight trains are supposed to maintain

average speeds of 60kmpl, but operate at much lower

speeds of 20-24kmpl.

Rail Vikas Nigam is responsible for executing projects that

pertain to rail-port connectivity including strengthening of

the golden quadrilateral and diagonals connecting four

metro cities (Delhi, Mumbai, Chennai and Kolkata) compris-

ing 10,000kms and developing multimodal corridors to the

hinterland. The projects are developed with equity contribu-

tion from major ports and Rail Vikas Nigam is responsible for

Route Km Running track km

Broad Gauge (1676mm) 86.62 89.96

Metre Gauge (1000mm) 9.83 7.49Narrow Gauge (762 and 610mm) 3.56 2.56Total (km) 64600 89801

Gauge -wise Indian Railway Network

Source: Ministry of Railways (2012).

Note: ‘Route kilometre’ is a unit of distance, measuring the distance by rail between two points on the railway network whereas ‘Running track km’ is the sum of all running lines

(Counting each line of doubled, tripled, etc. lines separately) between two points.

Avg lead distance (km)

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ITES


Years 1951 to 1971 1971 to 1991 1991 to 2005 1950-2005 2005 to 2012

Rail freight traffic elasticity 1.43 0.80 0.64 0.90 0.90

Road freight traffic elasticity 3.13 1.98 1.05 2.00 1.40

Total Freight traffic elasticity 1.77 1.29 0.87 1.30 1.20Sore: Planning commission, NTDPC research

Freight elasticity with respect to GDP

maintaining tracks and providing locomotives.

Indian Railways allowed private container operators from Jan-

uary 2006. However, government-owned Container Corpora-

tion of India still dominates container movement in India with

around 80% market share. The Dedicated Freight Corridor

Corporation of India was formed to implement India’s most

ambitious dedicated freight corridor project. On the basis of

past experience in India and the experience in other large

economies, India’s requirements of transport services is likely

to grow significantly faster than the overall GDP growth.

Sector 1st to 6th Plan (1951-85)

7th plan (1985-90)

8th plan (1992-97)

9th Plan (1997-2002)

10th plan (2002-07)

11th Plan (2007-12)

Railways 46.4 56.1 49.1 38.2 35.7 29.7

Roads 28.5 21.5 24.4 39.9 45.6 39.9

Road transport 7.6 7.3 5.9 5 2.4 2.3

Ports 6.3 5.1 3.5 4.2 1.4 3

Shipping 4.7 2.4 5 2.5 1.3 1.3

Light house 0.1 0 NEG NEG NEG 0.02

Inland water transport 0.4 0.6 0.2 0.3 0.2 0.4

Civil Aviation 6.1 6.6 11.4 5.8 3.6 7.9

Pradhan Mantri Gram Sadak Yojana 0 0 0 4.1 7.5 13.4

Other transport 0 0.2 0.4 0 2.1 2.1

Total (Rs bn) 255 295 656 1,196 2,422 6,472

Total Public Sector expenditure (Rs bn) 1,797 2,187 4,855 8,140 16,185 37,510

Transport sector % of total public sector expenditure

14.2 13.5 13.5 14.7 15.0 17.3

Share of transport in public sector expenditure: Five Year Plans (%)


Waterways – underutilised but with enormous potential

India has a long coastline, spanning 7,516 kilometres, form-

ing one of the biggest peninsulas in the world. It is serviced

by 13 major ports (12 government and 1 corporate) and 187

notified minor and intermediate ports. These ports account

for nearly 90% (by volume) of India’s international trade. Yet,

coastal shipping accounts for only 7% of the country’s total

domestic freight (on a tonne-km basis). In China, waterways

have a larger share than that of roads. Presently, India has

just 140 costal vessels, which carry 7% of overall cargo move-

ment. China has around 12,000 vessels specially built coastal

cargo ships for various sectors such as coal, steel, grains, and

fertilisers.

The economic growth seen in India over the past decade has

led to congested roads and an over-burdened railway net-

work. The potential of coastal shipping and inland waterways

is untapped and provides significant opportunities. There are

many inherent advantages of this mode of transportation.

Coastal shipping or use of water as a mode of transportation

is much safer, more economical, and less polluting. Water-

ways are 50% cheaper than roads and nearly 30% cheaper

than rail. The coastal leg, apart from being more fuel effi-

cient, can also carry larger parcel sizes and provides a great

opportunity for consolidation of loads and over-dimensional

cargo.

The share of bulk cargo commodities such as POL, coal, iron

and cement has come down from 94% in 2005-06 to 87% in

2009-10. On the other hand, the share of “Others”, which

includes container traffic, has seen a dramatic increase from

6% to 13% due to increasing containerisation of goods.

Gujarat and Maharashtra lead in growth of coastal-cargo

traffic at ports. They have been forerunners in creating infra-

structure, forging a conducive environment for business, and

attracting investments. These states are also bestowed with a

thriving industrial hinterland and with the implementation of

the Delhi-Mumbai Industrial corridor, the maritime environ-

ment in the two states will remain bullish.

The container movement by sea is also adversely affected

due to an absence of a hub in India. This causes additional

delays because containers have to take a feeder voyage

from India to a hub port and then wait at the hub port for

the mainline ship to call. In the absence of a hub port in

Share of water transport (%)

Operating cost per ton km Fuel efficiency ton km/litre

Shipping 0.75 105

Rail 1.18 85

Road 1.51 24

IWT is more fuel efficient as compared to road and train

Cargo breakup for costal movement

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“Lots of opportunities are there for costal shipping. Currently tiles from Morbi, Gujarat are transported by road to Kerala despite both are at costal location. We need to connect minor ports with road infrastructure that has a carrying capacity of at least 15-30 tonnes,” said Atul Kulkarni, a port consultant.

State-wise break up of coastal cargo

Typical coastal route for cargo in India

Inland waterways in India: limited successIndia has almost 14,500kms of navigable inland waterways,

of which 5,200kms are major rivers and 500kms are canals

suitable for mechanised crafts. Currently, Inland Waterway

Transport handles only around 1% of total inland cargo trans-

port. There is potential for other cargo such as coal, finished

steel, fertilisers, cement, food grains, dry bulk, and containers

to be transported economically and effectively through IWT.

It is environment-friendly and less costly vs. other conven-

tional modes such as road and rail. It reduces traffic conges-

tion problems on road and rail.

National Waterways come under the purview of the central

government and Inland Waterways Authority of India (IWAI),

whereas other waterways are under the control of the state

governments. IWT is functionally important in regions cov-

ered by the Brahmputra and the Ganges in the northeast and

eastern parts of the country, Kerala, Goa and in the deltas of

the rivers of Krishna and Godavari where IWT offers natural

advantages. In spite of its merits, its operation is constrained

India, a majority of the country’s containers are currently

transhipped through other ports i.e. Colombo (just south of

India), Singapore (east), Dubai, and Salalah (west). Handling

these through the Indian transhipment terminal would result

in savings of between Rs 6,000 and Rs 16,000 per TEU for

the Indian exporter.

The reasons for a hub port not evolving in India are insuf-

ficient traffic, cabotage law, and insufficient infrastructure,

including low draft due to which mainline bigger ships

cannot be berthed. All this routinely causes costly delays of

anywhere between 25 hours to 40 hours.

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l Should allow navigation of mechanically pro-

pelled vessels of minimum 300 tonnes (DWT)

capacity (45m x 8m x1.2m).

l 40mt wide channel with 1.4mt depth in case

of rivers and minimum 30mt wide channel with

1.8mt depth in case of canals. Exception may

be given in case of irrigation-cum-navigation

canals based on request of the concerned state

government in order to safeguard the interest of

irrigation.

l It should be a continuous stretch of minimum

50kms; only exception is for urban conglomera-

tions and intra-port traffic. It should pass through

and serve the interest of more than one state

or connect a vast and prosperous hinterland

and major port. It should either pass through or

connect a strategic region where development

of navigations is considered necessary to provide

logistic support for economic development or

national security, or connect place not served by

any other mode of transport.

Criteria for declaration of National Waterway

by several factors like shallow water, narrow width during

dry weather, siltation and bank erosion, inadequate vertical

and horizontal clearances in a large number of overhead

structures making navigation throughout the year a daunting

task. Cargo movement by IWT increased from 32mn tonnes

in 2003-04 to 63.8mn tonnes in 2012-13. Most of the cargo

movement by IWT takes place in Goa, NW1 - Haldia and

Maharashtra (90% share).

National Waterway

Location Stretch (kms.)

NW 1 Ganga-Bhagirathi-Hooghly river system from Allahabad to Haldia

1620

NW 2 Brahmaputra river from Sadiya to Dhubri 891 NW 3 West Coast Canal from Kottappuram to Kollam

along with Champakara and Udyogmandal canals 205

NW 4 Godavari & Krishna rivers & Canals between Kakinada and Puducherry

1095

NW 5 Brahmani river & Mahanadi delta system along with East Coast Canal

623

Declared National Waterways

The National Waterway-1 has been divided into three

stretches for operational convenience and is being devel-

oped for shipping and navigation. Least Available Depth

(LAD) of 2mts round the year is being maintained between

Haldia and Patna (1,020kms) and LAD of 1.5mts between

Patna-Varanasi (363kms) for most part of the year. However,

LAD of 1.5mts metre is maintained only for 4-5 monsoon

months in a year between Varanasi and Allahabad (237kms).

The volume of freight movement on National Waterways-1

was 2.7mn tonnes in 2012-13 and moved by CIWTC, VIVADA

IWL and other private operators.

The composition of cargo movement on National Waterway

1 over the years: Building material accounted for 64% in

2012-13.

National Waterway-1 (Ganga-Bhagirathi-Hooghly)

Cargo movement on national waterways (mn tonnes)

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In the first 25 years since the inception of the Inland Waterways Authority of India in 1986, it has spent Rs 11.07 bn for the country’s 4,500-km-long river route.


Year 2009 2010 2011 2012 2013

Building material 835585 1388365 1492395 1529401 1727685

Fertiliser 7500 52000

Food 42352 1434 9110 15000 345179

Miscellaneous 42814 145000 41984 22509 13842

Mix 1459428 21800

ore/minerals 96358 25283 2648 550 229000

POL 337189 277030 324111 281954 247341

Coal 1205 79590

Total 1354298 1837112 1877748 3310047 2716437

Composition of cargo moved on national waterway-I (tonnes)

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The future of cargo in India: Railways, DFCs, DMICDC, and waterways

M O DA L S H I F T – E N A B L I N G S U S T A I N A B L E G R O W T H

Cargo movement by train is more cost

competitive than roads, particularly

for a distance of more than 500kms.

However, in India, containers are

moved by road even for distances of more than

1,000kms due to poor rail infrastructure. With the

development of the Dedicated Freight Corridor

Corporation (DFCC) and Delhi-Mumbai Industrial

Corridor Corporation (DMICC), the growth rate in

the container trade could see a structural shift in

the coming years.

DFCs to the rescue

Dedicated Freight Corridors (DFCs) will strengthen

India’s rail transport infrastructure to meet expect-

ed high future demand for freight movement. The

development of DFCs will result in enhancing the

market share of rail in freight by providing an effi-

cient, safe, economical, and environment-friendly

option. The main earnings of the railways come

from its freight operations, which cross subsidises

its losses on running passenger trains. Currently,

passenger trains are given preference and cargo

trains are made to wait due to shortage of tracks.

In contrast, US railroads are (almost) exclusively

used for freight while high speed rail networks of

Japan are pure passenger routes. The average

speed of a goods train in India is about 25kms

per hour, which makes trucks a better option for

many customers. DFCC will reduce the unit cost

of transportation by creating rail infrastructure to

carry higher throughput per train. It will pro-

vide non-discriminatory access to freight trains

belonging to Indian Railways and other qualified

operators.

Construction of DFCs across the country is the

most ambitious project ever conceived by the

Indian Railways. Out of six DFCs planned in

a phased manner, two corridors (eastern and

western) are scheduled to be fully commissioned

by FY17-18. The eastern corridor will run from

Ludhiana in Punjab to Dankuni near Kolkata with

a length of 1,839kms and the western corridor will

stretch from JNPT near Mumbai to Dadri (Delhi)

with a length of 1,534kms. “Completion of project

is dependent on how fast subcontracting is done.

Most of the civil work is done by local players for

smooth execution. Out of the 3Ms (man, material

and machinery), managing the first two is critical.

Labour viability is difficult due to NEREGA,”

said an advisor to the DFC project. The phas-

ing of corridors is synchronised with the existing

most-saturated sections on the Mumbai-Delhi and

Delhi-Kolkata rail links. The growth in demand

is expected due to a DFC-driven increase in rail

share in port-based container traffic from current

22% to 35-40%.

DFCC will reduce the unit cost of transportation by creating rail infrastructure to carry higher throughput per train. It will provide non-discriminatory access to freight trains belonging to Indian Railways and other qualified operators


“For Dedicated freight corridor (DFC) to survive, shift from road to rail is a must. Parallel improvement in railway is also important to integrate existing terminals to DFCC,” said an advisor to the railway board.

Progress of Phase-1 of Western DFCC

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DMICDC will significantly boost railway cargo and untangle bottlenecks

DMICDC acts as a pass-through entity for specific pro-

jects and raises various financing instruments such as

‘Project Development Fund (PDF)’ that could be used

as a Revolving Fund and would specifically be used for

undertaking project development activities on a Pub-

lic-Private-Partnership basis. It will develop industrial

cities around a multi-modal high-axle-load dedicated

freight corridor between Delhi and Mumbai, covering

an overall length of 1,400km.

It will develop an area of around 150-200kms on both

sides of its alignment. Its project influence area (PIA)

comprises 430,000 square kilometres, which consti-

tutes around 14% of India’s total geographical area.

Six DMICDC states contribute 50% of India’s principal

crops, constitute 45% of the country’s GDP, and 58% of

value of output. The development of industrial regions

in these states will result in a 70% contribution to GDP

by 2030. The developmental planning for DMIC aims

to double employment potential in five years (15%

Pithampur-Dhar- Mhow – Master Plan

CAGR), triple industrial output in five years (25% CAGR),

and quadruple exports from the region in five years (32%

CAGR).

DMICDC will have 24 investment regions developed in

three phases out of which seven will be developed in

the first phase over the next five years. Each state has

one investment region, except Maharashtra, which has

two. The master plan for all seven industrial regions is

ready. DMICDC is planning to use information technol-

ogy to the fullest in addition to having a physical master

plan for all these cities. Cisco and IBM are to create a

digital layer on top of the physical plan for these cities.

The entire city control and governance will be managed

from one place with an integrated approach on a mas-

sive scale. To monitor real-time container movement,

DMICDC is working on logistics data software for con-

nectivity with all logistic players. Apart from DMICDC,

four more corridors will be developed by the Ministry of

commerce, where DMC will provide support.


Components (cost in Rs mn) 2012-2016 2017-2021 2022-2031 2032-2041 Total

Site Development Cost 443 39 20 11 513

Infrastructure Costs 1469 494 384 156 2503

Building Development Cost 417.3 1313.2 150 90 1970

Equipment Cost 257 195 225 227 904

Equipment Replacement 299 510 809

Total Capital Costs 2587 2041 1078 993 6699

Multimodal Logistics Hub –Investment Region of Madhya Pradesh ( 372.4 Sq. km)

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The cargo follows the manufacturing and con-

sumption patterns through most economical

ways. The development of DFCCs is expected

to provide high-speed capacity for railways

to move cargo while DMICDC will create

manufacturing and consumption centres.

Though transport through railways is cheaper

than roads even now, availability of capacity is

a major constraint. DFCCs will provide faster

evacuation on most congested routes by

separating cargo from passenger train routes

(currently, cargo is moved when passenger

trains are not running).

The government’s target is that 50% of all the

cargo in India should be transported by rail by

the end of the 15th plan. Rail and road freight

traffic are expected to grow at about 12% and 8% per annum

respectively to achieve a 50% share each in the total. Such an

increase in rail freight will not take place without substantial

expansion in rail-freight capacity. The government has recently

announced FDI in railways to improve rail connectivity to hub

centres. The Public Private Partnership (PPP) in rail projects has

had limited success so far.

The first PPP project, Pipavav Rail Corporation, has become

success a story, which can be replicated. Pipavav Railway Cor-

The development of DFCCs is expected to provide high-speed capacity for railway to move cargo while DMICDC will create manufacturing and consumption centres

poration Limited (PRCL), a 50:50 JV between

Ministry of Railways (MoR) and Gujarat

Pipavav Port Limited (GPPL), is operating a

271-km-long railway line connecting Port of

Pipavav to Surendranagar junction (Western

Railways) in Gujarat, both for freight and

passenger operations, for a concession

period of 33 years.

The major concern for cargo movement

through railways is that it subsidises passen-

ger traffic with higher cargo charges. The

average income from transporting a tonne

of goods over a kilometre (revenue per net

tonne km) is Rs 1.04, significantly higher

than the 27paise it gets from moving an

average passenger for every km. Subsidising

passengers through higher cargo charges has translated into a

fare-to-freight ratio of 25.9% from 34% in 2003-04 while revenue

per passenger km has remained almost static. Another way to

look at extent of cross subsidisation from freight to passenger

is fare–freight ratio which is one of the lowest in the world. It is

the ratio of passenger fare per km and freight rate per tonne km.

“India needs separate regulator for holistic transport policy to

reduce total logistic cost for country. Indian railway controls the

policy decision on notified commodities and haulage charges

Rail Transport: how can it attract more cargo?


Years Rail Traffic

(btkm)

% share

Road Traffic

(btkm)

% share

Total Traffic

(btkm)1950-51 44 88 6 12 50

1970-71 124 69 57 31 181

1990-91 247 47 283 53 530

2004-05 411 39 643 61 1054

2011-12 668 33 1385 67 2053

2016-17 (GDP -6.9) 1070 35 1987 65 3057

2021-22 (GDP -8%) 1885 39 2949 61 4834

2026-27 (GDP -8%) 3535 45 4321 55 7856

2031-32 (GDP -8%) 6559 50 6559 50 13118

Freight-traffic estimates with elasticity of 1.2

Revenue trend of Indian Railways (paise) Fare-freight ratio of world railways

The government’s target is that 50% of all the cargo in India should be transported by rail by the end of the 15th plan. Rail and road freight traffic are expected to grow at about 12% and 8% per annum respectively to achieve a 50% share each in the total

increasing cost of rail transport with limited opportunities to

private players and customers. ” said an advisor to railway board.

With consistent increase in railway charges, private container train

operators (CTO) are losing their competitive advantage over do-

mestic truck operators. The increase in rates on an ad-hoc basis

by Indian Railways is a point of concern and container train opera-

tors have very limited control over the largest cost component —

namely rail haulage. “The railway is looking at private container

operators as competitors and there is no policy support to make

business viable,” said a logistic consultant. CTOs are requesting

the Rail Tariff Regulatory Authority to bring rationality in traffic

and increase rail share in cargo movement.

Cost breakup

Railway freight is a major cost for container train operators

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Waterways – finding its way

The government’s focus on capitalising the potential of coastal shipping and inland waterways could result in opportunities for logistic players. It has relaxed cabotage norms for Vallar-padam port in an aim to transform it into a transhipment hub. It may consider the demand to relax cabotage at other ports a case-to-case basis. It is encouraging coastal shipping by giving an incentive package for manufacturers (50 paisa/tonne/nau-tical mile up to 500 nautical miles) and concessions on port charges.

The development of costal shipping is also linked to increased opportunities in container-feeder service. The possibility of a dedicated sea corridor with inter-port connectivity is also be-ing explored. The future of the port sector in India, especially for the minor ports, hinges a lot on coastal movement and in-land waterways. Minor private ports are expected to play an extremely critical role in the development of coastal shipping. The government is encouraging PPP models for development of infrastructure at ports and rivers to develop connectivity and promote coastal movement. “Land around the river is not available for development and the government is planning a floating dock for cargo evacuation. Creating and maintaining sufficient draft is a major issue,” said Atul Kulkarni, a port con-sultant. A change in the merchant shipping rules by permitting cabotage and simplification in the administrative requirements for enabling foreign flag vessels to operate on coastal routes is much needed. This would ensure higher availability of ships and more tonnage for coastal movement.

The development of inland waterways for coal transport and the upcoming Kaladan multimodal transport project will have a significant impact on cargo movement in India’s North East region. “Inland waterways are seeing renewed interest with the Jal Marg Vikas (Ganges waterways) project announced by the government with a budgetary allocation is Rs 42bn. World Bank support to revive NW1 would be a game changer,” said a consultant.

The deregulation of rail transportation of containers

by Indian Railways in 2006 was the first major effort of

the Indian Railways in attracting private capital to the

rail sector. The private investors invested over Rs 40bn

in wagons, containers, and terminals in addition to Rs

6.5bn as license fee. PE investors, investment banks,

and entrepreneurs have been keenly watching the rail-

ways’ ability to deliver a reasonable return on invest-

ment for the investors in this sector. However, the fre-

quent and steep increase in Rail Haulage Charges for

the container trains, together with incongruous policy

decisions, has put the entire investment in the con-

tainer rail sector in jeopardy and ruined the prospects

of additional investments. This has also raised doubts

about the Ministry of Railways’ seriousness and ability

to attract private investment in rail Infrastructure. The

Association strongly feels that the Government of

India should set up a Rail Tariff Regulatory Authority,

without further delay, to bring rationality and transpar-

ency in all rail freight pricing matters and direct the

Ministry to draw up a roadmap for promoting more

private investment in container rail business.

Source: Maritime gateway! New Delhi, January 29, 2013

Association of Container Train Operator (ACTO) strongly recommends GoI to set up Rail Tariff Regulatory Authority

Route Mode Distance (Km)

Kolkata to Sittwe port in Myanmar Shipping 539

Sittwe to Paletwa (River Kaladan) IWT 158

Paletwa to Indo-Myanmar Border ( in Myanmar) Road 110

Border to NH.54 (Lawngtlai) In India Road 100

Kaladan Multimodal transport project

IWAI and NTPC developed NW1 for transporting coal through compet-itive bidding (Jindal ITE was an operator). NTPC has committed that it will transport 3mtpa of imported coal from Haldia to Farakka by IWT for seven years. There are several existing thermal power plants along the Ganga and many more are going to come up. The success of this pioneering project may pave the way for many more projects for trans-portation of coal on NW1 and possibly on other national waterways. It may also become a catalyst in reviving the inland water transport mode in the eastern and north-eastern parts of the country.

National waterway NW1 – Coal transport for power plant success story


Carriage of cargo between two points within a country by a vessel or vehicle registered in another country. Permission to engage in cabo-tage is, in general, strictly restricted in every country. A change in India’s highly restrictive cabotage laws appears likely and this could have significant ramifications for ports and particularly container terminal operating companies across the country.

What is Cabotage?

Change in custom rules to make coastal shipping cheaper As per current customs rules, imported cargo is required to be

brought (physically landed) at the port facility, which increase the

cost significantly. Since most major ports in India lack the ability to

handle capesize vessels (largest cargo ships in the world), coupled

with the complicated customs rule, cargo has to be brought to port

in smaller vessels and then needs to be reloaded in barges — all

this leads to an additional cost of Rs 500 per tonne. Meanwhile,

Chinese steel industry imports ore from Brazil using very-large

ships of 4.35mn MT and discharges cargo mid-sea on to barg-

es, which carry it to end points (industries). The cargo is treated

as landed when it is transferred to the barges. For China, ocean

freight and logistics cost comes up to Rs 1,400 per tonne while in

India the same operation would cost Rs 4,500 per tonne as both

rail and road costs are involved. The change in Indian customs (to

examine the process of imported cargo (such as coal and iron ore)

at anchorage point and levy import duty there) will allow cargo to

move directly from the ship to industries.

The shipping ministry has started talks with stakeholders about easing a cabotage law for transhipped export-im-port containers and empty containers on Indian waters, a spokesman said. The plan is to allow foreign-registered ship to undertake business on local routes. The cabotage law mandates using Indian ships for transporting cargo among ports along the country’s coast. Foreign ships are allowed to operate only when Indian ships are not available; this requires a licence from India’s maritime regulator. An excep-tion was relaxing the cabotage for the international contain-er transshipment terminal (ICTT) at Vallarpadam in Cochin port during the United Progressive Alliance (UPA) regime. The relaxation (for three years beginning September 2012) applies only to foreign-registered vessels that ships export and import containers out or in through ICTT at Vallarpad-am. The Dubai-based DP World Ltd runs the ICTT. Shipping industry executives say a relaxation has become necessary for a new container terminal, the third, that has started operations at Mundra port through a venture between Adani Ports & Special Economic Zone (APSEZ) and Geneva-based Mediterranean Shipping Co. S.A. (MSC). “MSC wants to run the new terminal as a transshipment facility,” said a shipping industry executive on the condition of anonymity. “This can succeed only if the cabotage is relaxed.” The planned con-tainer transshipment terminal at Vizhinjam port in Kerala and a container terminal run by a joint venture of United Liner Agencies of India Pvt. Ltd at Vizag port in Andhra Pradesh have also sought easing of cabotage. However, local ship owners are against the plan. “We are opposed to relaxation in cabotage,” said Umesh Grover, chief executive officer of Indian National Shipowners Association (INSA), the local fleet owners lobby.

Source: Mint, 16 June 2014

Cabotage relaxation gathers steam after NDA government takes over

Kaladan Multimodal Transport Project:

It is conceptualised by the Ministry of External Affairs to provide alternative connectivity for Mizoram with Haldia/Kolkata ports through the Kaladan River in Myanmar. The project envisages coastal shipping from Haldia to Sittwe, inland water transport from Sittwe to Paletwa (in Myanmar), and thereafter by road from Paletwa to Mizoram. It is funded at a cost Rs 3.42bn and the construction of Sittwe Port is 75% complete. The Kaladan Mul-ti-modal Transit Transport Model is expected to be fully complete by 2016. The India-Myanmar-Thailand trilateral highway corridor is also one such projects that is expected to be ready by 2016, which will open up the possibility of trade and investment in the North-East region.


M O V I N G T O W A R D S G L O B A L S T A N D A R D

Container traffic has remained one of the highest growing cargoes in India historically, with a GDP multiplier of around 2x. Logistic players related to container movement and trade are uniquely placed to benefit from growing international trade and a shift to containerised cargo from bulk.

Why containerisation is likely to increase

The sustained growth of containerised cargo at

a CAGR of about 15% over the last ten years has

acted as a major catalyst in maritime trade growth.

Container traffic growth has also provided impetus

to the development of maritime transport and

logistics industry, with the emergence of several

private-public partnerships for provision of port

and other cargo-handling facilities, alongside sev-

eral new private ports such as Adani and Pipavav.

The break-bulk cargo (non-containerised) is typi-

cally moved by containers due to lower costs and

ease of handling. Globally around 85% of break-

bulk cargo is moved by containers while in India

the figure is around 50-52%. Growing containeri-

sation of cargo has brought about a significant re-

definition of organisation of port terminal services

and demand for highly sophisticated handling

equipment and inland logistics network. The main

containerised cargoes are garments, electronic

goods, agro products, cotton yarn, machinery/

parts, granite products, coir products, leather

products, and jute products. Goods that were not

containerised until now are now being transported

by containers (tea, newsprint, rice, maize, glass,

granite, garnet sand, soya, cement, and flowers)

due to its innumerable advantages over break-bulk

cargo transport.

The handling cost is lower for containerised cargo

vs. break bulk. The cost advantage also occurs due

to India’s balance of trade. With 40% more imports

than exports, incoming containers wait for reposi-

tioning to other locations. Container lines, instead

of spending on shipping back empty containers,

offer good deals for specific locations — as a re-

sult, soya, sugar, steel plates and agricultural prod-

Containerisation: Lifting the trade


ucts have gone the container way. In most cases, transport

by containers is around 20% cheaper and safe with lower

wastage. Some break-bulk cargoes such as banana, cotton,

and green coffee beans have become permanent container

fixtures, while others such as pulp, lumber, cocoa and onions

migrate from container to ship holds and back to containers,

according to the rise and fall of box rates. Even iron ore has

been successfully exported from Chennai in containers.

Most of India’s container cargo moves through gateway ports

in north-west India, accounting for around 65% of the con-

tainer trade. Container traffic mostly belongs to major ports.

Only select non-major/intermediate ports such as Pipavav

Port and Mundra Port cater to containerised traffic. The share

of container cargo as a percentage of total cargo at major

ports has increased from 14% in 2004 to 21% in 2014. A

substantial incremental demand should come from a shift of

general cargo in break bulk to containerised form. Historical-

ly, container cargo has grown at 2x GDP (growth is very high

in economic recovery period). With increased container pen-

etration and development of industrial corridors, the growth

should increase.

JNPT Port

l Maersk India Private ltdl Gateway Distriparksl United Liner Agencies of Indial Transindia Logisticsl Seabird maritimel Balmer Lawriel Concorl CWC - kalamboli and Mulundl Allcargo

Mundra

l Mundra CFS Pvt ltdl CWCl Forbes Gokakl Parekh Marinel Allcargo

Chennai

l Concor

l CWC

l Balmer Lawrie

l Binny

l Gateway

l Allcargo

Container Volume at Indian ports (‘000 TEU)

Indian infrastructure for logistics is poor compared to the world and at best reactive to demand. There is a need for continued focus on quality infrastructure development with speed. Container volume is expected to grow 3x from current 10mn TEU, which will require 15-25kms of berth length. At 300mts per berth, this translates to 70berths. Currently, there are around 30 berths with around nine under construction. Therefore, there is a need for at least 30 more berths to handle the expected container cargo volume.

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Container Freight Station and Inland Container depot — now and future

Shipping lines and EXIM customers rely on CFS and ICD to

be an integral part of their logistics value chain. They are a

critical part of the logistics chain in relation to the movement

of containerised cargo. An ICD is located in the hinterland,

away from the gateway ports of the country whereas a CFS

is an off dock facility located near ports to facilitate decon-

gestion at the ports. Functionally there is no distinction

between an ICD/CFS as both are transit facilities, which

offer services for containerisation of break bulk cargo and

vice-versa. However, CFS helps in decongesting the port by

shifting cargo and has customs related activities outside the

port area. CFSs are largely expected to deal with break-bulk

cargo originating/terminating in the immediate hinterland of

a port any may also deal with rail borne traffic to and from

inland locations.

l Concentration points for long-distance cargoes

and its unitisation.

l Service as a transit facility.

l Customs clearance facility available near the

centres of production and consumption

l Reduce level of demurrage and pilferage.

l No customs required at gateway ports.

l Reduce overall level of empty container move-

ment through stuffing and de-stuffing activities.

l Competitive transport cost.

Benefit of ICD/CFS

CFS facility at JNPT port


It all depends on shipping lines

Shipping trends will play an important role in deciding

whether the Indian ports have potential for hub opera-

tions. Hinterland connectivity is a critical aspect to ensure

a seamless flow of containers and improved port produc-

tivity. Currently, 30% of the traffic is expected to move

hinterland by rail and the remaining is expected to move

entirely by road, mostly to nearby CFS, and some to the

interior Inland Container Depots (ICD). There is a lot of

road-based congestion due to insufficient infrastructure.

Interfacing with customs is another issue.

Shipping lines and consolidators are the main decision

makers in the choice of CFS for bringing in import con-

tainers and export cargo. Their decision is mainly depend-

ent on the service levels of CFS. CFS earn more revenue

from handling import containers than from export contain-

ers, mainly due to ground rent. Operators earn ground

rent from storage of import containers pending clearance.

No ground rent is earned on export containers as it is the

operator’s responsibility to move export consignments

to the port. Most of CFS operators’ volume comprises

of handling import containers (JNPT 90%, Chennai 75%,

Mundra 52%).

The earnings are a function of location, handling charge,

and ground rent. The earnings per TEU vary from Rs 8,

000 to Rs 11,000. Margins are higher in JNPT at 50-55%

while they are 28-40% in Chennai. Dwell time varies from

8 to 11 days allowing the players to enjoy ground rent.

Revenue mix of typical CFS operator at JNPT port, Mumbai

The future of CFS/ICD — steady growth

The CFS / ICD sector continues to display overall moderate

growth despite the economic slowdown. Most segments of

this industry have low leverage, giving players a degree of fi-

nancial flexibility to weather the slowdown. However, margins

have seen significant decline. CFS operators started offering

higher discounts to shipping lines to attract cargo (hence the

margin impact). Most operators believe it is difficult to see

a reversal in volume discounts offered to shipping lines and

now this is the ‘new normal’ for profitability.

Falling profitability of CFS operators

Container Train Operators

Though Indian railways allowed private container train oper-

ators (CTO) in 2006, the latter remained marginalised players

(limited success stories). The entry of CTO was expected to

boost container movement by creating a level playing field

and with support from the Indian Railways. However, most

container train operators feel that the Railways has treated

them as competitors. Railways imposed tariff and non-tariff

measures, which impacted the viability of private CTOs. “The

delay in wagon acquisition is a major issue in increasing train

capacity and wagon wheel is imported for container rakes.

We are importing under Served From India Scheme (SFIS)

and supplying to railways. It has lowered the cost of buying


wagons,” said a container train operator. The vast

existing CFS and ICD network of Container Corpo-

ration of India has created a near monopoly in EXIM

cargo. The domestic business has lost out to truck

operators due to continuous increase in haulage

charges and re-classification of commodities in the

higher slab.

Indian Railways issues freight circulars, some of

which deal with reclassification of commodities.

Even when rates are left unchanged, sometimes the

re-classification of commodities into higher bands

automatically increases their transportation cost.

CTO sitting on fence

CTOs are waiting for one more chance to come

back With the development of DMICDC, which is

proposing a common user facility, all players are

expected to get a level playing field. For domestic

businesses, the implementation of GST is expect-

ed to create regional warehouse and distribution

centres with hub-and-spoke structure. The cargo

between hub centres will be transported by rail

A series of increases in charges imposed by the Indian Rail-ways and container shipping lines may push firms that move goods on container trains to raise prices of their products. The railways have levied a 10% congestion charge on base freight rates for goods that originate at ports. The new surcharge has been effective since 24 November. To add to the woes of firms that transport goods through trains, haulage charges have also been raised by 27%, starting 5 December. Haulage charg-es are imposed for using railway tracks, signals and telecom-munications infrastructure and constitute about 75% of the operating cost of container train operators. This, in turn, will increase transport and logistics costs for firms, forcing them to pass the additional costs to customers .......... A McKinsey and Co. study says inefficiencies in logistics infrastructure cost India’s economy $45 billion annually, about 4.3% of gross do-mestic product. This is the ninth round of rate increase in rail haulage charges since 2006 when this sector was deregulat-ed, said Sharat Chandra Misra, president of the Association of Container Train Operators, a lobby group for private container train operators. Currently, there are around 15 private contain-er train operators in the country, out of which three or four are inactive. During the last 10 years, the Indian Railways has in-creased freight charges five times with a cumulative increase of 52%, while these nine revisions in rail haulage charges levied on container train operators have resulted into a cumu-lative increase of 120% in the base category and a whopping 230% to 265% in the heaviest weight slabs

Mint, Tue, Dec 02 2014

Prices of goods moved by freight trains may rise

In transportation, the most important factor is getting return cargo. Transporters lose money if they do not get return cargo. The domestic CTOs are struggling with finding sufficient return cargo. Tariff and non-tariff measures taken by Indian railways since 2009 resulted in a decline in domestic business for CTO. “Our domestic container rail business has come down from 65% of revenue to now around 5% over past five years” said leading container train operator

operators, while the last leg will be taken care of

through road transport. This will result in a better

fill factor for train operators. The implementation of

a tariff regulator, common user logistics parks, and

development of a regional distribution network with

efficient tax system is expected to give new life to

private container operators.


S No Name of Company Promoter Group Promoter’s Other Activities Category Licence Fee Paid (Rs mn)

1 Adani Logistics Adani Group Ports, container terminal, railways, CFS

I 500

2 Central Warehousing Corporation (CWC)

PSU under Ministry of Consumer Affairs, Food and Public Distribution

Warehousing, CFS I 500

3 CONCOR PSU under Ministry of Railways Incumbent I 500

4 Emirates Trading Agency

Emirates Trading Agency Shipping and port services I 500

5 Gateway Rail Freight Gateway Distriparks CFS I 500

6 Hind Terminals and MSC Agency

Hind Terminals (subsidiary of Sharaf Group, UAE), Mediterranean Shipping Company (Geneva)

Shipping, freight forwarding I 500

7 India Infrastructure and Logistics

APL India (subsidiary of NOL, Singapore), Hindustan Infrastructure Project and Engineering

Container shipping, infrastruc-ture entrepreneur

I 500

8 Container Rail Road Services

DP World Ports, container terminal I 500

9 Reliance Infrastructure Leasing

Reliance (ADAG) Industry in general I 500

10 Sical Multimodal And Rail Transport

SICAL Logistics Ltd CFS, container terminal, shipping agency

I 500

11 Delhi Assam Roadways Delhi Assam Roadways Trucking IV 100

12 Innovative B2B Logis-tics Solutions

Bagadiya Shipping and Bothra Brothers (P) Ltd Shipping agency and entre-preneur

IV 100

13 Boxtrans (India) Logis-tics Services

JM Baxi & Co Container terminal, CFS, stevedoring

IV 100

14 Pipavav Rail Corpo-ration

Gujarat Pipavav Port Limited and MoR Ports, railways III 100

15 Arshiya International Arshiya Ltd CFS, Warehouse I 500

List of leading container train operators

Conclusion:

India has got an opportunity to channelise its trade through efficient modes of transport and should not delay the imple-mentation. The development of DFCs alone is not a solution to problem, though it will provide much-needed high-speed capacity on the most-congested western route. The connec-tivity to DFCCs through efficient feeder routes and policy support to attract cargo towards railways is important. The government should set up a Rail Tariff Regulatory Authority to bring rationality and transparency in all rail-freight pricing matters in the coming budget. The DMICDCs success will depend on creation of new manufacturing hubs as well as consumption centres along DFCCs. The government should not just stick to providing connectivity. The implementation of GST should be done as early as possible to create an

efficient distribution network with a hub-and-spoke arrange-ment. Using India’s huge coastline and its river network by developing efficient waterways is creating opportunities for new players in coastal shipping, dredging, and construction. The success of national waterways-1 through World Bank support will provide efficient coal movement to existing and upcoming power plants and can be replicated on other national water ways. Kaladan multimodal transport project can transform the socio-economic structure of the north east region and should be implemented on a priority basis. Overall, the focus on efficient modal shift in cargo movement is set to give level-playing opportunities to new players. It is going to improve cost competitiveness by providing a strong framework to achieve higher sustainable economic growth.


Mr Gupta has been the MD of CONCOR since December

2009 and its Chairman since March 2013. He is an IRTS

officer of the 1982 batch. He is an M.A., M.Phil. (Economics)

from the Delhi School of Economics, and an MBA (NMP). He

has been involved in almost all the developmental planning

and operational activities related to multimodal carriage and

handling of export, import and domestic cargo at the various

dry port terminals managed by CONCOR and the many

commissioned during the last 15 years.

We understand that Western DFCC would bring transfor-

mation in container traffic. To what extent is the cargo

expected to shift from road to rail after DFCC?

Currently, the containerised cargo moving by rail is around

22%. As per our estimate, with the commissioning of DFC,

this should increase to around 40%.

How is DFC progressing? What is the revised commis-

sioning timeline and cost?

The officials of DFC will be in a better position to answer this

question. For our purposes we are presuming that Western

DFC will be fully commissioned by March 2018.

How will cost per TEU be after DFCC vs. now?

We will not be able to make any predictions, given heavy

capital costs for Western DFC. We only hope that with in-

crease in throughput per train and increased speed of trains,

the cost per TEU will come down in DFC as compared to

current transportation costs by rail.

Who are currently the anchor or major customers for

container business?

Actually, shippers are our primary customers, guided by op-

erational strategies of Liners/Shipping Lines. Almost all lines,

incidentally the big ones, like Maersk, CMA-CGM, APL, MSC,

Hapag Lloyd, etc., transport their containers on our trains.

What will drive the pricing and margins in container busi-

ness going ahead?

Pricing in container business will be dictated by market forc-

es. With the recent hike announced by Ministry of Railways

on rail transportation of containers, it will be interesting to

Q & A with Mr Anil K Gupta, CMD, Container Corporation of India Ltd.

see how the market reacts.

What is the overall growth expected in container trade in

India linked to GDP growth?

Container trade is likely to grow in India as the extent of

containerisation in our country is much less than Internation-

al standards. Growth in GDP will push this growth further

upwards.

Are any new commodities shifting to container from bulk

and what is the potential for a shift from bulk to contain-

er cargo?

Export of agri produce such as rice and wheat are now

already moving by containers. However, majority still move

in bulk form. The percentage of containerised movement will

grow.

We understand CONCOR is way ahead in acquisition of

rolling stock and setting up logistic parks. What would be

CONCOR’s competitive strength to capitalise the DFCC

and DMICDC developments as competitors would also

become aggressive?

We are setting up 15 Multimodal Logistic Parks (MMLPs)

across the length and breadth of our country. Five of these

MMLPs will be on Western DFC at vantage locations.

Besides this, we have 63 Terminals across the country. We

have a fleet of 245 High Speed Rakes and we are procuring

around 20 rakes every year. This vast infrastructure will ena-

ble CONCOR to remain first and only choice of its custom-

ers.

What are the investment in opportunities in logistic parks

and the capital expenditure on it? What is the typical

asset turnover in logistic parks and margin profile?

We have embarked on an ambitious expansion drive with

a planned investment of Rs 6000 crores during Twelfth Five

Year Plan period. This will be utilised in setting up of 15

MMLPs and acquisition of assets like High Speed Rakes and

containers. All our investments have to pass a benchmark

IRR stipulated by our Board from time to time.


Jio: Yet to find its VOICE

BY NAVEEN KULKARNIT E L E C O M

Teasers start appearing, markets spooked? In what some people may term too good to be true, Jio’s data plans will

be launched for as low as Rs 51 per GB on its WiFi network. Jio show-

cased some more products on its preview website with grand data plans at

100Mbps speeds and new devices for home entertainment. The preview

website is not accessible now, but the trailers have spooked telecom stocks,

which corrected by 14% in the last one month. Impending 900MHz and

1800MHz auctions, which do not guarantee that sufficient spectrum will be

made available, is another reason for the price correction in telecom stocks.


3. Jio WiFi Start-up Plan – Offer Price: Rs 51

per GB

4. Jio Mobility Bundle (NTMore) – Price: Rs

3,010

This plan offers Jio MiFi device with all Reliance

Jio Services (LTE, Wi-Fi, digital, and media servic-

es). A Rs 500 plan for this device will offer 10GB of

data. It also comes with a VoLTE SIM card.

5. Jio MiFi Product (NTMore) – Price: Rs 2,610

This Jio MiFi device will offer internet connectivity

to five devices at once through Wi-Fi. A Rs 100 Jio

MiFi Start-up Plan will offer 1 GB data along with

digital services.

The attractiveness of Jio’s data plans is unques-

tionable and its objective seems clearly to address

the data market with differentiated offerings.

Competition for its products seems limited. Jio

means to tap the home market segment, which

has been elusive for most telecom operators until

date. Its launch strategy will be noteworthy in the

current context as it tries to address the needs of a

difficult-to-tap market.

A whole lotta spending!

It will be exactly 9 months today since this maga-

zine ran the cover story of Reliance Jio in its inau-

gural issue. In these months, Jio has continued to

invest at a feverish pace in developing a fibre-op-

tic backbone across cities. In the first six months of

this financial year, Jio has invested US$ 2.3bn, thus

Telecom stocks performance December

Jio’s overhang cannot be understated though —

even if it launches data plans at twice its teaser

rates, i.e., at Rs 100 per GB, they will still be much

lower than market rates that hover around Rs 250

per GB. If Jio backs its plans with superior speeds

and quality of service, its offering will be definitely

disruptive. However, for now, market reach and

scalability are still the two most critical factors for

Jio to make an incisive impact on the competitive

landscape. Jio’s primary operating band is consid-

ered to be 2300MHz with TD-LTE technology —

on this, both reach and scalability are constrained

by airwaves-propagation characteristics and device

ecosystem.

Some of the products profiled on Jio’s preview

website were:

1. FTTH FIP Alpha

FTTH FIP Alpha Offer — a fibre-to-the-home

(FTTH) connection; 100Mbps speed; usage quota

of 100GB with free on-net usage discount; one-

month validity. Package box will include the router

gateway, router drop cable, WI-FI, and ethernet.

2. FIP Alpha with Wi-Fi and JioDrive

The FTTH connection; 100Mbps speed; usage

quota of 100GB; free on-net usage discount; one-

month validity; 100GB of cloud storage for one

year. It might come with a Wi-Fi Hotspot device,

which will offer high-speed internet connectivity in

various cities.


taking its total invested capital to US$ 9bn. The upfront

investment has exceeded most analysts’ expectations

but Jio’s commercial launch is still a while away.

Delays in a project of such magnitude can be attributed

to various reasons including getting timely approvals

from local bodies in various cities (the bureaucratic

machinery is not as efficient in other states as it is in Gu-

jarat) or the availability of handsets. Jio recently got al-

location of spectrum in the 1800Mhz band in 14 circles

and the grapevine suggests that it has started ordering

equipment. With 1800MHz rollouts likely over the next

6-8 months, Jio’s mass-market product strategy is still

under wraps. Most of its deployments till date are on

2300 MHz using TD-LTE technology; on its 1800MHz,

FD-LTE deployments are likely.

The two technologies have markedly different handset

ecosystems and dual compatibility of handsets has lim-

ited commercial viability. However, Jio’s hiring continues

to remain fervent and industry observers believe that

it has amassed an army of professionals with varying

capabilities to address the business and technological

issues that lie ahead.

Ready to take off, but limited ammunition for battle

For Jio, some cities like Ahmadabad, Vadodara, Coim-

batore, and Navi Mumbai might be network-ready in

a couple of months, but its product offering may not

be mass market. Pankaj Agrawal of Capitel Partners,

a leading Telecom Consultancy firm, believes that

2300MHz TD-LTE and 1800MHz FD-LTE do not have

a mass-market appeal because of the limited handset

ecosystem and limitation of propagation characteristics

of the two bands. Voice is another big problem area for

Jio — without a compelling voice proposition, it will not

be able to execute a churn-based strategy (if indeed

that is its plan). For Jio to offer a compelling voice

proposition, it needs to own sub-gigahertz frequencies

— without this, its reach and mass-market appeal will

be constrained and it will not be able to compete with

incumbents that are providing voice on the 900MHz

band.

Pankaj strongly advocates the case of launching 3Gser-

vices on the 800MHz band with the ability to service

both voice and data customers. In India, 800MHz is a

CDMA band, but globally it is called the 850MHz band

and is known for its superb propagation characteristics

and a highly evolved handset ecosystem (which is similar

to the 900MHz band). Currently, Reliance Communications

owns 5MHz contiguous blocks in 12 circles in this band and

in most other circles Jio could buy spectrum through the

auction route. For Jio, acquiring liberalised 800MHz spec-

trum through auctions and spectrum trading with Reliance

Communications will be the cornerstone of its strategy and

success.

Auctions will unveil Jio’s much-awaited voice strategy

In the upcoming 900MHz and 1800Mhz auctions to be

held in February or March 2015, the government is likely to

auction 800MHz spectrum blocks and announce spec-

trum-trading norms after the auctions. Jio still has to secure

spectrum on the 800MHz band and then get approvals for

buying spectrum from RCOM — this means that a compel-

ling voice offering from Jio is still around 12 months away.

However, the likelihood of Jio acquiring 800MHz spectrum

has increased after TRAI’s announcement of pricing and

availability of spectrum in the band.

The quantum of spectrum for auction will be critical as lim-

ited and non-contiguous availability will help Jio establish

lower benchmark prices for spectrum trading with Reliance

Communication. On the other hand, more spectrum and

contiguous blocks will mean that even incumbents will

participate in the auction and securing spectrum for voice

will be challenging. Whether voice becomes Jio’s Achilles

heel or a game changer will depend on the outcome of the

auctions.


Cub Club

Reliance Jio recently inducted Mr Mukesh Ambani’s eldest

son, Akash Ambani, into its board. Akash is working on Jio’s

go-to-market strategy with Managing Director Mr Sandip Das

and Mr Manoj Modi. Akash graduated from Brown Univer-

sity (majoring in economics) and will be instrumental in Jio’s

launch. The task is cut out for the young Ambani and it re-

mains to be seen whether he will be able to forge a success-

ful business strategy in a highly competitive industry.

A divided world

The market views Jio’s launch as disruptive and believes

the profitability of incumbents will be severely impacted

as a churn-based strategy will mean discounts galore. On

the other hand, some leading industry experts believe

Jio’s launch will help the data market to grow while voice

tariffs will keep moving north. The latter argument has

some merit as the data market is in a nascent stage and

voice is a mature market. The telecom space is buzzing

with anticipation — and for now, all eyes are on the

impending auctions and Reliance Jio’s launch.

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Adapt or Perish – The future of secondary steel producers in India

Secondary steel producers: Survival questioned

There is no end in sight for the problems for the sec-ondary steel sector. Many are still struggling for survival with demand continuing to stay low and primary producers gaining further market share. Their margins are under siege with a significant surge in imports of long products (key end product for secondary produc-ers) due to a fall in their prices and raw material issues (non-availability along with high pricing). While many secondary producers have already fallen prey to the situation (shut down) the queue of producers on the brink of collapse keeps getting longer.

Demand recovery pushed further

FY15 started with an assumption of 5-6% steel-con-sumption growth led by expectations that the new government will start pushing various stalled projects. The demand was expected to be more back ended than front. However, steel consumption growth has continued to stay sluggish with only 1.5% growth in April-October 2014.

Various ground checks suggest that there are no signs of consumption picking up in the near term, except for a seasonal uptick in March 2015. With no major pick up in demand from infrastructure projects, demand stays

low. However, the marginal uptick in automobile pro-duction (except commercial vehicles) continues to help steel consumption, although not in a big way.

Marginal pick up in demand from auto and weak posi-tioning of secondary players (CRC re-rollers) has seen the sales of major steel producers (towards the automo-bile industry) increase significantly compared to their overall growth. Tata Steel has seen a 23% yoy jump in sales to the auto sector during H1FY15 vs. only 4.2% overall volume growth. Other producers like JSW Steel & SAIL have also seen their focus on the auto sector increase, with dedicated plants being set up to meet requirements. JSW has set up a 2.3mn-tonne CRM mill (partly commissioned) to cater to high-end automotive products. SAIL is also on the verge of commissioning a 1.2mn-tonne CRM mill at its Bokaro steel plant.

Primary steel producers continue to gain share from secondary producers

Market share shift from unorganised sectors (secondary producers) to primary producers (as seen in FY13 and FY14) continued this year too, with all major primary producers (except JSPL, which grew in line with market due to raw-material issues) reporting higher volume growth compared to steel consumption growth in India.

BY DHAWAL DOSHIM E T A L S

The Ground Zero April issue “Adapt or Perish: The future of secondary steel producers in India” tried to assess the damage inflicted on this high employment generating sector. The only solution was to evolve and adapt to the changing paradigms but in the interim the heat of economic change would smelter some who will emerge leaner-stronger while charring others..


This trend is likely to continue as almost all major producers have expanded their capacities and significantly gain on cost compet-itiveness compared with the secondary sector. The expanded capacities will start or have already started contributing to volumes.

Raw material issues – stemming from various regulatory issues

Raw-material issues and falling steel prices (import pressures) have seen the margins squeeze for the segment with raw-material issues being the major culprit. Various regulatory issues have seen sourc-ing problems and cost of major raw-materials (iron ore and thermal coal) increase for the sector. This situation is in stark contrast to the global scenario, where raw material prices have plummeted leading to fall in global steel prices (42% fall in iron ore prices since the start of FY15).

Supply of iron ore has shrunk sharply after the government shut down iron ore mines in Orissa and Jharkhand. This has resulted in costs spiralling for the sector. The situation got further aggravated with the government’s decision of asking Coal India to stop e-auc-tions of coal, a primary source of coal for the sector, which saw the companies rely on imported coal (expensive).

Market share loss + falling margins = Perfect recipe for sector shake out

Falling market share, dwindling volumes, low margins, and high financial leverage —the perfect recipe for a shakeout in the sector. Many small and large steel plants have faced the axe with some successful in selling them while others continue to bleed or have shut operations.

Recent examples — JSW Steel’s acquisition of Welspun Maxsteel. Welspun Maxsteel operated a gas-based sponge-iron plant without any integration. Deteriorating financial conditions due to low utilisations and shrinking margins forced the sale. Bhushan Steel, a large producer, could see asset sales. Bankers are contemplating selling assets of its Orissa steel plant (5mn tonnes) to recover some of its huge debt. The buzz in the metals space is that a medi-um-sized steel producer (more than 1mn tonne capacity) is in nego-tiations to sell some of its operating plants.

While there have been some developments in the large space, smaller players in the unorganised sector have seen a good churn with people either planning to sell their capacities or shutting down their plants. 58 plants (steel and raw-materials related) have put up their plants for sale through various advertisements on a leading website in the last 6 months.

India steel consumption growth Automobiles volume growth

Volume growth

H1FY15

India Steel consumption 1.50%

Tata Steel 4.20%

JSW Steel 4.60%

SAIL 1.80%

JSPL 1.40%

Capacity addition

Company Location Incremental capacity (mn tn) Commissioning

Tata Steel Kalinganagar 3 FY15 end

JSW Steel Dolvi 1.7 H1FY16

Vijaynagar 0.8 FY16 end

JSPL Angul 2.4 Commissioned

Raigarh 0.5 Commissioned

SAIL Rourkela 1.9 Commissioned

Burnpur 2.4 Q3FY15

Bhilai 1.9 Q3FY16

No. of plants

Sponge iron 10

Induction furnace 15

Ferro Alloys 2

Pellets 2

Rolling Mills 15

Miscellaneous 14

TOTAL 58

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The jewellery retailing market has seen interesting developments since the GZ May edition “Two States” — South Indian jewellers entering North Indian markets and the opportunities and challenges they are likely to

face. There were changes in regulations, gold prices were vola-tile, and macro-economic conditions were tough. In the light of some of the ideas in the May edition, here is a short discussion on few key developments.

Supply at ease

The RBI eased gold import norms twice over the last 7 months. It restored Gold-on-lease and has done away with the 80:20 rule (which mandated that 20% of imports be exported). This has paved the way for smoother gold imports and a more predictable spot premium (this had shot up to 8% due to gold scarcity).

Gold Deposit Schemes

Shaken and Stirred – The New Companies Act brought gold deposit schemes under its ambit and structurally changed the dynamics of the market. There are about 11,000 gold savings schemes in the country. The Act deems instalment-based gold purchases as deposits. Moreover, the discount that jewellers offered on the redemption of the total amount at the end of the deposit scheme will now be considered as return on the deposit. The tenure of the deposits cannot exceed 12 months, thus practically putting an end to the various schemes run by jewellers (which ran into 3+ years). The new act stipulates that total deposits collected by an entity cannot exceed 25% of its net

worth. These changes have had far-reaching implications. These schemes were important customer acquisition and retention tools and an all-important source of working capital for many regional jewellers, who finance their inventory through customer advances.

Gold deposit schemes are extremely popular in South India and have been a fundamental reason for customer loyalty to the local/regional jeweller. However, with the Act covering private limited companies as well, some of the largest players face challenges in retaining customers. With various news and media reports imply-ing that the gold-deposit schemes that were operational were in contravention to the rules and regulations, customers have be-come apprehensive, says Mr Rajesh Vummudi of Madras Jewlery Association. He adds that many jewellers have seen a 50% drop in enrolments and renewal of schemes after these media reports began surfacing. This is unsurprising — the South-Indian jewellery market is the most evolved market in India with a high level of customer awareness.

Double whammy

The other implication of these changes is pressure on working capital finances. Customer advances were always a cheap source of working capital for jewellers. But they may now have to start relying on debt, which will push up their cost of capital. There-fore, jewellers, especially South-based ones, will face challenges in retaining customers and managing balance sheets (especially with the 25% net worth cap). Gold deposits drive around 30-40% of the jewellery sales in the South. Given its balance sheet strength, a player such as Titan’s Tanishq can reinvigorate its

BY ABHISHEK RANGANATHANR E T A I L I N G

When South meets North - The Bangle is yet to fit


strategy to gain market share by driving an attractive deposit scheme in the relative tough and very competitive South Indian market.

Gold as investments has lost its glitter

Gold as an investment vehicle seems to have lost steam as import curbs, high customs duty, and gold prices in general have been viewed as unfa-vourable by short-term investors. This is corroborated by the fact that the investment-led demand (coins and bars) in tonnage for the first nine months of 2014 constituted only 24% of total gold demand vs. 36% in 2013.

Competition has not intensified as evident by store expansion of South-based players - The three major south-based players — Malabar Gold & Diamonds. Kalyan Jewellers, and Joy Alukkas — have collectively added only 9 stores in India of which 6 are in South India. This indicates a pause in their aggressive expansion strategy. One of the South-based players confided that their expansion plan in India is on hold due to the high import duty and because they operate on a bought-out inventory model for gold, they would be risking inventory losses due to import-duty reduction. That apart, the core business model is being re-evaluated by some of these players because after the initial euphoria on entering a new city in north India, the core aspect of design, diamonds, customer service (lack of regional staff), de-centralisation challenges and supply-chain issues seem to be holding them back.

Data of stores of key players

Particulars Malabar Kalyan Joyalukkas PC Jeweller Tanishq TBZ

Stores as on May 2014 73 54 48 40 162 27

Stores as on December 2014 75 58 51 47 166 28

Break up of jewellery and investment demand

GRT’s Gold saving schemes ( after)GRT’s Gold saving schemes (before)

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Maximum City – Minimum InfraThe GZ MONTH edition on Mumbai infrastructure, titled “Maximum City, Minimum Infra”, highlighted the state of the city’s infrastructure, which is in a dire state and needs an urgent and massive upgrada-tion. Years of negligence and poor planning have rendered even some mega infrastructure projects (such as Bandra-Worli Sealink) ineffective in easing bottlenecks. While the road network needs an ur-gent upgradation across the city, it is high time that the city had an extensive MRTS and water transport system. However, the GZ edition also noted that things were looking up for the city, with multiple large-scale infrastructure projects recently commis-sioned and many others on the anvil. Some of these recently commissioned projects were expected to remove infrastructure bottlenecks and ease traffic congestion. Few key large projects were expected to see clearance of obstacles and were to begin execution over the next two years.

Accordingly, multiple projects have seen rapid progress in the last six months. At the same time, newer projects have considerably eased traffic congestion and debottlenecked the infrastructure of the city. Some of the key developments, over the last six months are:

l Commissioning of the Eastern-Freeway and Santacruz-Chembur Link road: This has signifi-cantly eased traffic congestion on existing roads such as Eastern express highway and LBS Marg.

l Metro phase-1 and Sion-Panvel highway have begun operations.

l Commissioning of metro phase-1 has consid-erably decongested local train stations such as Dadar and Andheri and reduced travel time for a large part of the population.

l Bidders have been shortlisted for Mumbai-Met-ro phase-3 and orders are expected to be awarded by April 2015.

l Orders have been awarded for water-transport terminals at Nariman Point, Bandra, Dadar and Nerul.

l State funding of Rs 450bn has been approved for Metro phase-2 (Dahisar-Charkop-Band-ra-Mankhurd) and phase 5 (Wadala-Ghat-kopar-Thane-Kasarvadavali).

Upgradation of Mumbai infrastructure will translate into a mammoth opportunity leading to robust order inflow and hence strong topline growth for EPC companies. Companies with a strong local presence, such as J Kumar Infraprojects and HCC and large diversified players such as L&T and NCC, will benefit from the opportunity. For example:

l L&T, HCC and J Kumar have been shortlisted for metro phase-3

l J Kumar has been awarded a contract to construct water-transport terminals at Nariman Point, Bandra, Dadar, and Nerul

Even with all these projects, the infrastructure of the city still needs massive upgradation. The recently commissioned projects and the proposed ones ad-dress the needs of the city incrementally, but only partially. It still need scores of similar large-scale projects along with an upgradation of the existing ones to fit the definition of a ‘developed country’, which, as Mr Enrique Penalosa, former mayor of Bogota, Colombia, so aptly defined as – “A devel-oped country is not a place where the poor have cars. It’s where the rich use public transport”.

BY VIBHOR SINGHALI N F R A S T R U C T U R E


Project Rs bn Financing Status Timeline*

Metro Phase III (Colaba-Bandra-SEEPZ) 244 Rs132bn tied up with JICA Bidders shortlisted; bids submitted in Dec-14 Awarding by Apr-15

Metro Phase II(Dahisar-Charkop-Bandra-Mankhurd)

265 State govt + JICA The earlier phase II, awarded to Reliance Infra, has now been extended to Dahisar, and will be awarded in EPC basis. State govt funding approved.

Bidding by CY15 end

Metro Phase V (Wadala-Ghatkopar- Thane-Kasarvadavali)

191 State govt + JICA State govt funding approved. RFQs to be called in, after submission of DPR. Bidding by CY15 end

Trans Harbour Link 96 Funds being tied up with JICA All clearances received; BOT dropped; to be awarded as EPC Bidding by Apr-15

Bandra Versova Sealink 43 Mostly state govt* CRZ clearance received; awaiting EC Award by CY15 end

Water Transport 10 State govt Construction contracts awarded in 2012 CoD by CY15 end

Elevated Rail Corridor 210 VGF; real estate monetization 80% land acquired Bidding by mid CY15

Navi Mumbai Airport 62 All PAP paid; all clearances in place; Land acquired Bidding by Apr-15

Navi Mumbai Metro 41 State govt Under construction CoD by CY16

Total 1,162

Mumbai Infra – A mammoth opportunity

Completed Projects Proposed Projects

Metro Phase I

International Airport T2

SCLR: Santacruz-Chembur Link road MTHL: Mumbai Trans Harbour Link

Monorail Phase I

Eastern Freeway

Sion Panvel Highway

Bandra Versova Sealink

Navi Mumbai International Airport

Metro Phase III

MTHL

Elevated Rail Corridor to Virar

To Virar

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Banking at the bottom of the PyramidGZ’s June cover story on bot-tom-of-the-pyramid banking explored the opportunity and presented various business models that can make inclusive banking commercially viable and scalable. Banks need to redesign their business strategies to incorporate BoP banking as a business opportunity and not solely as a corporate social responsibility. To realise this opportunity, an entirely new portfolio of products and services have to be created, delivered through radically different distribution structures, which are aligned to the needs and lifestyles of the financially excluded consumer.

In 2014, a lot of initiatives and progress was seen towards inclusive banking under Pradhan Mantri Jan Dhan Yojana (PMJDY). PMJDY is a National Mission on Financial Inclusion encompassing an integrated approach to bring about comprehensive financial inclusion of all households in the country. The plan envisages universal access to banking facilities, with at least one basic banking account for every house-hold, financial literacy, access to credit, insurance, and pension facility. In addition, the beneficiaries would get RuPay Debit card having an inbuilt acci-dent insurance cover of Rs 100,000. The plan also envisages channelling all government benefits (from centre/state/local bodies) to beneficiaries’ accounts and pushing the Direct Benefits Transfer (DBT) scheme of the Union Government.

The progress made under the scheme and business oppor-tunity: Bank account for entire household. The “Pradhan Mantri Jan Dhan Yojana” has been a great success. Till date, various banks have opened cumulative 100mn sav-

ings-deposit accounts under the scheme with total outstanding balance of Rs 76.91bn.

The opening of accounts has increased coverage of households having banking to 85% by November 2014 compared to 59% as per 2011 census. Census 2011 estimated that out of 246.7mn households in the country, 144.8mn (59%) households had access to banking services and 101.9 mn (41%) had no ac-cess to formal banking services. Of the 167.8mn ru-ral households, 91.4mn (54%) were availing banking services. Of the 78.9mn urban households, 53.4mn (68%) were availing banking services.

Opportunity for banks in terms of low-cost deposits: The 100mn saving deposit accounts have enabled banks to mobilise savings deposits worth Rs76.9bn, much above any expectations. Howev-er, challenges remains in terms of keeping these account operative. Therefore, these accounts come with additional features of insurance and overdraft facility in order to incentivise depositors to keep these accounts operative. The huge number of sav-ings accounts opened provides a great opportunity for banks to augment low-cost deposits, provided they use cost-effective technology to make available basic financial services.

Lending opportunity to the huge unbanked section: The initial overdraft facility of Rs 5000 per account will act as a testing ground for banks in terms of lending opportunity. The demand for micro credit at the bottom of the pyramid segment is enormous, but the success for banks will depend on controlling the asset quality at a reasonable cost. The traditional method of banking does not work and banks needs to reinvent their delivery channel to

gain success.

BY MANISH AGARWALLAB A N K I N G


Set to capitalise on growth opportunity!!

Volumes to bottom out in FY15 and pickup from FY16

Most genset players faced significant headwinds in FY14 due to the weak investment cycle — this led to a decline in volumes. As recovery picks up in 2HFY15, volumes could gain traction. Interac-tion with industry players indicates volumes have bottomed and demand could see a recovery in FY16. The replacement market is currently driving most of the demand and companies are optimistic on a recovery led by the revival in infrastructure spending (especially in the road sector). Price hikes have also driven revenue growth in 1HFY15.

Price increase under new CPCB norms

The MOEF introduced the CPCB-2 norms for India in July 2014. These mandated a reduction in engine exhaust emission for diesel gensets up to 800kW. Key alterations required in existing mechanical engines included turbochargers, air and fuel filters, and piston bore. Genset prices rose 10-15% after these norms were implement-ed. In turn, engine manufacturers took price hikes of 20-25%. Citing poor market conditions, most genset players acknowledged difficulty in passing on price hikes. This, coupled with higher import-ed content could lead to continued weakness in margins in the near term.

Market share gains for Cummins in the low KVA segment

The market is still in the process of absorbing and adjusting to the recent price increases. With the market still in transition, it is difficult to gauge market share gains for any company. However as pricing stabilises over the next two quarters, Cum-mins India should gain market share, especially in the lower end of the market. Globally, Cummins has gained share after any emission change — India should not be an exception.

Ground Zero’s July 2014 edition “Diesel Gensets- In a Sweet Spot” highlighted how genset players would benefit from the change in emission norms and improvement in demand.The edition highlighted three themes— a pick up in volumes, price increases on compliance with new emission norms, and market share gains by organised players at the cost of unorganised players.

Power Gen - Revenue Growth

BY ANKUR SHARMAE N G I N E E R I N G

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Crops await modi-ficationThe Ground Zero series “Crops await

– Modi-fication” highlighted the need

for and the economic benefit of a

move to biotech crops and that this

pro-reform, pro-farm government

would expedite matters that benefit

the growth of this industry. Two things

where emphasized — 1), low yields

and rising mouths to feed are two

good enough reasons to drive tough

reforms in the seeds sector, and 2) the

seed sector would continue to grow

at an impressive rate, irrespective

of where regulation heads. The

profound acceptance to BT cotton

and its tangible economic impact

should lead the way for other crops

such as BT brinjal and BT maize. This

update attempts to look at events

after the August edition of GZ.

Modi-led government backs GM crop field trials

Very recently, the environment minister was ques-tioned in the Rajya Sabha for approving the GEAC decision to okay field trials of 12 GM crops (cot-ton, rice, castor, wheat, maize, groundnut, potato, sorghum, brinjal, mustard, sugarcane, and chickpea). The minister strongly backed his decision and said that GM crops have beneficial traits such as insect resistantance, herbicide/drought tolerance, and they enhance yield and nutrition. He has also said that there is no scientific evidence to prove that GM crops would harm human health or the environment. Besides, the government also shared details of the BT cotton success story in India.

BY GAURI ANANDA G R I I N P U T S

“There is no scientific evidence to prove that genetically-modified crops would harm soil, human health, and environment” — Environment Minister Prakash Javadekar, in a written reply to the Rajya Sabha on 4th Dec.”


Delay in monsoon to pull seed industry growth down in FY15

In Kharif 2014, delayed rains pushed overall sowings lower by 2.2%. However, less-intensive cotton crop and rice sow-ings grew over last year. As for Rabi, the rains so far remain uninspiring, water levels are below the 10-year average, and overall sowings are down by 6.5%. The overall seed market should grow in lower single digits in FY15, principally helped by about 12-15% growth in cotton. While the current year growth is timid, the medium- to longer-term growth of this sector should be good.

The macro opportunity in Indian seeds is enormous due to rising population, shrinking per-capita land availability, lower crop yields, and lower penetration of hybrids in key crops. In India, saved seeds dominate the seed market (in agriculture, seed saving is the practice of saving seeds for use from year-to-year for sowing). This is the traditional way farms were maintained. A hybrid seed is made by manually pollinating two parents to get an offspring with a desired trait; however, as it costs money to buy these seeds, the farmers prefer to sow ‘saved’ seeds from last year’s crop, which accounts for about 75% of the total seed market in India even today.

Date Country Biotech Events

9-Dec-14 Canada Approves an event of Alfaalfa for food, feed & cultivation

4-Dec-14 Canada Approved Soyabean events for food, feed & cultivation

3-Dec-14 South Korea Six new approvals for HT and IR Maize

1-Dec-14 Taiwan Food approval for Maize events (IR and HT)

21-Nov-14 Australia Approval to HT Canola

12-Nov-14 USA Approves 10 new Potato events

12-Nov-14 USA Approves one new Alfaalfa event

5-Nov-14 Australia & NZ Approves new HT Cotton

3-Nov-14 Brazil IR Maize for food, feed and cultivation

23-Oct-14 Singapore Approved new HT Maize

20-Oct-14 USA New Soyabean event for food, feed & cultivation

16-Oct-14 South Korea Ten new approvals for Maize and Cotton

16-Oct-14 Colombia Approves six new Maize events

8-Oct-14 Canada Approves Maize for food, feed and cultivation, while Soyabean for only feed and cultivation

24-Sep-14 Taiwan Approves three new Soybean traits

3-Sep-14 Taiwan Three new food/feed approvals for Soybean & Maize

More countries approve biotech crops:

Biotech events since our last update

Reports also indicate that the Environment Minister met the farmers’ body and several other stakehold-ers to build a consensus on GM crop trials. There are 4 stages to field trials — greenhouse, BRL1, BRL2, and biosafety. After the Environment Ministry’s okay, the companies have to obtain a NOC (no objection certificate) from individual states for commencing field trails. There are enough hints to suggest that eventu-ally the government could give its nod for ‘confined’ field trials of GM in food crops (maize, brinjal, rice, mustard, chickpeas). As for cotton, the industry is now bracing for the next generation technology, RR Flex (presently it is BG II), a technology that would make the cotton crop tolerant to herbicide application and boost yields by about 15-20%. Mahyco is in the final leg of receiving approval from GEAC (already approved by the Review Committee of Genetic Manipulation). This is also expected to perk cottonseed realisation by Rs 150-200 per packet.

GM crops have been grown commercially since 1996. Since then, the area planted with GM crops (globally) has increased over 100 times — from 1.7mn hectares in 1996 to around 175.2mn hectares worldwide in 2013. This represents roughly 3.5% of total agricul-tural land. The GM seed market was worth over US$ 15.6bn in 2013. The global value of the harvested crops is estimated to be worth over 10 times this. Most cotton grown in China is genetically modified and so are papayas and some poplar trees (grown for wood). China has developed a number of GM traits for maize and rice that await the go ahead to be commercialised as the government is now attempting to convince its people that it is safe for consumption.

The rapid adoption of biotech crops world over in the initial 17 years of commercialisation is in itself a testimony to BT crops as safe for human health. It also confirms the economic and health benefits to the farm-ers and society. Bangladesh, Indonesia, and Panama approved biotech crop planting in 2013 with commer-cialisation in 2014. As cotton/maize is widely adopted in 15/17 countries, respectively, it is logical to expect that India will also adopt maize technology at some point in the future. We gather that Monsanto India GM corn is currently at bio-safety research trial-2 stage and management has guided that it will take at least 2-3 years for commercial launch. The initial trials suggest that Monsanto GM corn boosts yields by 20-40%. Monsanto India may not be required to share royalty with Monsanto US.

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Acceptance to hybrids has increased, given the efficacy and higher yields, but they remain underpenetrated in key crops. The penetration of commercial open-pollinated hybrid and GM seeds has increased from 25% of total seed requirements to about 30%. The seed replacement rate is expected to rise further on rising awareness of its tangible benefits (higher yield and lower costs that would drive per/hectare profitability) and thus double-digit growth rates are sustainable over the medium term.

Cotton - Dominance to stay: The hybrid seed market in India is valued at US$ 2bn and cotton alone accounts for 40% (Rs 46bn). The major contributing factor to the growth has been the increased adoption of BT cotton. With delay in monsoon, the cotton sowings (as it is less water intensive) in Kharif season CY14 was higher by 10.6%. It is estimated that India will surpass China in cotton production in FY15 and the initial estimates point to cotton production surpassing 40mn bales (175kg each). While there is pressure on prices due to higher supply, the MSP could rise next year thereby supporting the

cotton acreage growth in India in FY16. Besides, with a prefer-ence towards dense planting over conventional cropping and a likely rise in farm mechanisation, the consumption of seed per packet is expected to increase to two packets per hectare from around 1.5 packets – driving demand for cotton seeds. Also cotton seed prices are due for revision in FY16; with no state elections next calendar, the government could announce price hikes next season.

Maize - to witness higher growth: The demand for corn is continuously growing due to population growth (an addition of almost 20mn every year) and growing demand for poultry products (rise in disposable incomes causing dietary shift), as corn is the most important feed for the poultry industry. India is the world’s sixth-largest consumer of maize and as per estimates, India’s corn demand may rise to 40-45mmt by 2030 against the current production of 25mmt. Maize is the third-largest cereal crop sown in India after rice and wheat. Despite the rising demand, the hybridisation reach in maize is still about 55%, offering growth. While the production of

Kharif Sowings, mn hect SS14 SS13 % *Rabi Sowings, mn hect SS14 SS13 %

Rice 38.00 37.64 1.0 Total food grains 40.08 42.83 -6.4

Cotton 12.66 11.44 10.6 Wheat 24.19 25.13 -3.7

Soya 11.03 12.22 -9.7 Total pulses 11.11 12.48 -10.9

Tur, Urad, Moong 10.23 10.91 -6.2 Total oilseeds 6.99 7.53 -7.2

Maize 7.84 8.22 -4.6 Jowar 2.90 3.41 -14.8

Bajra 6.84 7.47 -8.4 Maize 0.97 0.97 0.5

Sugarcane 4.87 5.03 -3.1 Rice 0.16 0.16 -2.5

Jowar 1.85 2.17 -14.8

All Crops 102.66 104.95 -2.2 All crops 47.07 50.37 -6.5* data as of 12th Dec 2014

Delay in monsoons pulled sowings down for most crops except cotton and rice

Seed Ind size Rs bn mn hectare Hybrid % Players

Cotton 42 11.45 93 Nuziveedu (~21%); MM (11%); Kaveri (~18%),Ajeeth (10%),Ankur (10%)

Wheat 19.8 30.61 5

Paddy 16 42 6 Bayer Crop Science (~40%); Kaveri (6%); Pioneer (15-20%); Rallis; Nuziveedu

Maize 11 9.72 60 Monsanto (18%); Du Pont (18%); Syngenta (12.5%);Kaveri (14%); Nuziv (12%)

Groundnut 9 4 75

Soya 7.7 12.22 75

Vegetables 8 8 82 Nunhems (subs of Bayer), Kaveri, Nuziveedu

Others 2 50.72 30

Total 115.5 168.72

Indian seed industry in value terms in FY14

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maize has been steadily rising, Indian yields at 2.45mt/ha is still half the world average. Monsanto India, Pio-neer/Dupont, Dow Agri Sciences, Pioneer Overseas, and Syngenta Biosciences have applied for GM biosafety field trials with the GEAC. Of them, Monsanto is in the final leg of getting approval. While this will take about 3-4 years to be commercially launched (on approvals), it is said that it can improve yields by 20-40%.

Given the delay in monsoon, the area under maize has been flat. However, the hybrid seed market has taken a beating due to the perceived risk of a crop failure. We ex-pect corn prices to firm up next season and drive sowings and demand for seed.

Hybrid rice penetration is just about 6% - huge oppor-tunity

Rice is one of the few crops that are grown around the year in India. It is the largest sown crop (although acre-age has fallen to 42mn hectares (down by 3mn)), and production is likely to be 106.29mmt in FY14. While India is the second-largest producer of rice, yields are half the global average because almost 95% of 42mn hectares of rice areas grow traditional high-yielding varieties (i.e., use of saved or varietal seeds) vs. 30% in China (the world’s biggest rice grower) whose use of hybrid technology has boosted average yields to more than five tonnes per hectare. In India, yield per hectare has improved by 18% in the last decade; however, it has stagnated over the last 5 years. Rice is a water-intensive crop and only 55% of the acreage under cultivation is irrigated, partly explaining the lower yields and thus production. It is the government’s vision to increase area under hybrid rice to 10mn hectares by 2025 (was about 2mn hectares in FY13). Due to this aggressive target, BT in rice is a distinct possibility in the near future. Dupont, DCM Shriram, BASF, Pioneer, and Metahelix, are some of the companies who have applied for various stages of field trials. As rice is an extremely water intensive crop, the area under hybrid rice seems to have shrunk in FY15.

Vegetables seeds – fastest growing, high-margin segment

India is the second-largest vegetable producer (162mmt in FY13; China is the largest) in the world. Hybrid-veg-etable seed is one of the fastest-growing segments in our country today and it is hybridized to the extent of about 80%. Although it is a small market for seed makers (companies may not earn revenues of >Rs 2bn), the margins are upwards of 50% unlike cotton (~15%) and corn (~25%). Vegetable seeds account for about 12% of the seed industry in value terms; however, given increased acceptance the share should rise.

The Supreme Court is holding back research and field trials of new genetically modified (GM) crops, limiting growth prospects. India is the second-largest producer of

Area (mn hect)

Production (in mmt)

Kharif Yields

(kgs/ per hect)

Rabi/Summer Yields

(kgs/ per hect)

FY04 7.50 14.18 1,932 2,987

FY05 7.60 14.71 1,740 3,224

FY06 7.80 15.10 1,799 3,076

FY07 8.26 18.96 1,660 3,793

FY08 8.17 19.73 2,122 3,854

FY09 8.33 16.72 2,048 4,387

FY10 8.60 21.73 1,740 3,694

FY11 8.80 21.76 2,285 4,003

FY12 8.71 22.26 2,234 3,765

FY13 9.50 23.50 2,244 3,969

FY14 9.70 24.5 2255 4,002

CAGR (5yr) 2.66 2.43 1.84 -1.98

CAGR (9yr) 2.66 5.83 1.68 3.21

Area, production and yield of maize crop

Segment wise consumption of maize in India

mt FY14 FY15E %

Cotton* 420 482 15%

Paddy 93,000 88,000 -5%

Bajra 14,360 12,000 -16%

Maize 106,000 90,000 -15%*packets of 450 gms each

Seed industry to degrow in FY15E except cotton

Source: Ministry of Agriculture

Source: Industry estimates

Source: Industry estimates


eggplant and BT eggplant seed (when approved) should help increase the size of the vegetable seed segment (currently estimated at around US$ 140mn). Brinjal is a very pest-prone crop and normally requires up to 30 sprays of insecticides. It is estimated that insecticide consumption in brinjal can fall by 70% and improve yields almost 2x if BT brinjal is used. However, the approval for BT brinjal in India is still pend-ing. Bangladesh, which approved BT in Brinjal in 2013, has commercialised the crop this year - this raises the chances of Brinjal slipping into India illegally and makes a further case for approval of BT brinjal. Ankur Seeds, Rasi Seeds, Bejo Sheetal, and Mahyco are some of the companies that have applied for field trials in BT brinjal.

Hybrid rice penetration is just about 6% - huge opportunity

Rice is one of the few crops that is grown around the year in India. It is the largest sown crop (although acreage has fallen to 42mn hectares (down by 3mn)), and production is likely to be 106.29mmt in FY14. While India is the second-largest producer of rice, yields are half the global average because almost 95% of 42mn hectares of rice areas grow traditional high-yielding varieties (i.e., use of saved or varietal seeds) vs. 30% in China (the world’s biggest rice grower) whose use of hybrid technology has boosted average yields to more than five tonnes per hectare. In India, yield per hectare has improved by 18% in the last decade; however, it has stag-nated over the last 5 years. Rice is a water-intensive crop and only 55% of the acreage under cultivation is irrigated, partly explaining the lower yields and thus production. It is the gov-ernment’s vision to increase area under hybrid rice to 10mn hectares by 2025 (was about 2mn hectares in FY13). Due to this aggressive target, BT in rice is a distinct possibility in the

near future. Dupont, DCM Shriram, BASF, Pioneer, and Meta-helix, are some of the companies who have applied for various stages of field trials. As rice is an extremely water intensive crop, the area under hybrid rice seems to have shrunk in FY15.

Vegetables seeds – fastest growing, high-margin segment

India is the second-largest vegetable producer (162mmt in FY13; China is the largest) in the world. Hybrid-vegetable seed is one of the fastest-growing segments in our country today and it is hybridized to the extent of about 80%. Although it is a small market for seed makers (companies may not earn revenues of >Rs 2bn), the margins are upwards of 50% unlike cotton (~15%) and corn (~25%). Vegetable seeds account for about 12% of the seed industry in value terms; however, given increased acceptance the share should rise.

The Supreme Court is holding back research and field trials of new genetically modified (GM) crops, limiting growth pros-pects. India is the second-largest producer of eggplant and BT eggplant seed (when approved) should help increase the size of the vegetable seed segment (currently estimated at around US$ 140mn). Brinjal is a very pest-prone crop and normally requires up to 30 sprays of insecticides. It is estimated that insecticide consumption in brinjal can fall by 70% and improve yields almost 2x if BT brinjal is used. However, the approval for BT brinjal in India is still pending. Bangladesh, which approved BT in Brinjal in 2013, has commercialised the crop this year - this raises the chances of Brinjal slipping into India illegally and makes a further case for approval of BT brinjal. Ankur Seeds, Rasi Seeds, Bejo Sheetal, and Mahyco are some of the compa-nies that have applied for field trials in BT brinjal.

Area in ‘000 hect Production in mmt Yields kg/hect

2009 2013 CAGR% 2009 2013 CAGR% 2009 2013 CAGR%

Potato 1,828 1,992 2.2 34 45 7.2 18.81 22.76 4.9

Tomato 599 880 10.1 11 18 13.1 18.61 20.71 2.7

Onion 834 1,052 6.0 14 17 5.5 16.26 15.98 -0.4

Brinjal 600 722 4.7 10 13 6.7 17.30 18.62 1.9

Cabbage 310 372 4.7 7 9 5.6 22.16 22.94 0.9

Cauliflower 349 402 3.6 7 8 4.8 18.72 19.62 1.2

Tapioca 280 207 -7.3 10 7 -6.9 34.37 34.96 0.4

Okra 432 531 5.3 5 6 8.8 10.48 11.96 3.4

Peas 348 421 4.9 3 4 8.3 8.38 9.52 3.2

Others 2,399 2,627 2.3 29 34 4.2 12.14 13.07 1.9

Total 7,979 9,206 3.6 129 162 5.9 16.18 17.62 2.2

Area, production and yields of key vegetables


Oncology : The biggest global opportunityCancer is not just a vague notion anymore — it’s getting too close for comfort. Ask anybody around you — chances are they know of somebody close who has died of cancer or is fighting the disease at the moment. It has become one of the biggest threats to human beings with 8.2mn people dying of the disease and 14.2mn people being diag-nosed with it every year. Cancer’s rapid progress and high treatment costs have made oncology the leading therapy in the world. As per IMS Institute for Healthcare Informatics, the global oncology spending touched US$ 91bn (up 5%) in 2013, making oncology the biggest therapeutic class, more than twice the anti-diabetic category (second largest).

A look at the global R&D pipeline suggests that oncology holds the largest innovation pipeline

(with about 550 molecules, out of the total of about 900 for all the therapies put together). Such a large R&D pipeline in the field of oncology around the world provides more growth visibil-ity for this segment. Evaluate Pharma, a global pharma research organisation, estimates that the oncology segment will record the highest sales growth among major therapy categories with a CAGR of >11% to US$ 153.4bn during 2013-2020.

Patent expiry seems to be the low-hanging fruit

While the largest developmental pipeline in on-cology provides stronger long-term visibility, we believe genericisation of blockbuster cancer mol-ecules in the advanced markets are low-hanging opportunities for Indian peers. In fact, the patents of a series of oncology molecules (with annual

Patent expiry of block-buster drugs to in advanced market offer huge generic opportunity for Indian Oncology peers

BY SURYA PATRAP H A R M A C E U T I C A L S

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sales of about US$ 60bn) in advanced markets such as the US, EU and Japan will expire in the next 5-6 years (over 2015-2020) — this provides enough growth visibility for players such as Dr Reddy, Sun Pharma, Biocon, and Natco.

Within oncology, biosimilars offers a sustained growth opportunity

The rising dominance of biologic/targeted therapy products in the upcoming innovative cancer drug pipeline as well as drugs approaching patent expiry indicates the larger growth opportunity in the biolog-ic/biosimilar space. In fact, of the total 550 oncology molecules in the global R&D pipeline, over 60% (i.e., 338) belong to biologics. Similarly, biologics account for over 70% of the total patent generalisation op-portunity of US$ 60bn in the oncology segment over 2015-2020.

In addition to developed markets, prevailing de-ficiencies in cancer care make emerging markets lucrative

Export opportunity to emerging markets (with a sale potential of about US$ 20bn and an annual growth of 12-15%) holds big potential for Indian peers. The incidence of cancer is high in emerging markets due to a variety of reasons such as lack of access to infor-mation, prevention, early detection, and treatment. Improving awareness towards cancer care boosts the diagnosis of undetected cases and drives growth. According to the International Agency for Research on Cancer, the death toll in the emerging markets will jump to 6.8mn in 2020 from 5.3mn in 2012 — a much higher rate than the developed world. In just another 10 more years that is by 2030 it is expected

to touch 9mn.

While the oncology business opportunity in the emerging market is large and lucrative, these markets have developed their own regulatory protocols, which become key challenges for product registration. To overcome this, Indian peers such as Natco, Biocon, and Intas Pharma, have forged alliances with local players to deal with regulators and penetrate these markets.

A brief perspective of Indian cancer scenario – India was hit by lack of adequate infrastructure

l 1.8 million: People living with cancer in India (within five years of diagnosis)

l 683,000: Deaths due to cancer in 2012

l Over 1 million: Number of new cases getting added every year

l Females (accounts for 53%) are more prone to cancer than males

l Amongst female breast cancer accounts for 27% fol-lowed by cancer of the cervix (23%), colerectum (5%), ovary (5%) and mouth (4%)

l Among males, mouth cancer is the most predominant, constituting 18% of the total cancers followed by lung (11%), stomach (9%), colorectal (8%) and oesophagus (6%).

l Overall, breast and cervical cancer are highest amongst the Indian population followed by mouth, lung, and colorectal.

l 80% of cases in India occur before 65 years of age — around 15% of cases occur at early ages (before 35).

l 1,000: Total number of trained oncologists in the country


(doctor-patient ratio of 1:1,800)

l 30: Dedicated cancer hospitals in India

l >15%: Indian population covered under some form of health insurance

Rising competition and price control plagued domestic growth, but volume-led growth is immi-nent

With a revenue base of about Rs 22bn, the Indian oncology pharmaceuticals market is the fourth larg-est in terms of volume in the world and the eighth largest in value. It saw a moderated annual growth of 18-20% in recent years (vs. 25-30% 2 years ago). In fact, the rising competition in the traditional chem-ical-based oncology drugs (80% of total oncology market) and recent price control initiatives by nation-al pharma pricing authority (NPPA) have moderated growth. However, the domestic oncology market should show strong volume growth driven by the continued rise in cancer incidence, better diagnosis, improved access to cancer therapies, better health insurance coverage, and more importantly, rising awareness in rural and interior areas.

While the traditional chemical-based oncology drugs market is highly competitive with about 125 compet-itors (including 30-35 actual manufacturers and other traders), the biologic/targeted therapy segment (~20% of sales) maintains healthy growth of over 25% due to limited completion on the back of com-plex R&D capability and its capital intensive nature.

While drug prices remain inelastic, the R&D capa-bility and special discounts ensure better market share

Due to the lifesaving nature of oncology drugs, there is an inherent price-inelasticity in demand. Price plays a very limited role in the success of an oncology brand, as R&D/manufacturing capability, quality standards, and most im-portantly, the acceptance of the drug by the oncologists, matter a lot in brand creation.

Within oncology products, there is a wide gap in the prices of similar products in a particular category — this is primarily due to different R&D effort, quality parameters, and documental initiatives. However, the most surprising fact of oncology product prices is that the ‘maximum retail price’ is not the price at which drugs are bought and sold!

Since hospitals account for 80% of oncology drug purchas-es, it is the undisclosed ‘special rate’ provided by drug manufacturers that plays an important role in grabbing market share. Since hospitals are major buyers, and be-cause there are limited number of cancer hospitals in India, the suppliers/manufacturers have low bargaining power or none at all. Based on the opportunity size and volume of supply, companies offer huge discounts against MRP. These special discounts are as high as 50-60% for tradi-tional chemical-based drugs and 20-25% in limited-com-pletion biologic drugs.

Nonetheless, the oncology segment offers better profit-ability than other therapies despite the special discounts. Private hospitals enjoy maximum profit led by large discounts in oncology drugs followed by trust hospitals (who pass on a portion of the special discount to patients), manufacturers, and distributors.

Conclusion:

The huge patent expiry opportunity in advanced markets, large gap between cancer care and treatment access, and volume-led growth in the domestic market make oncology the most opportune segment for Indian pharma peers. Dr Reddy, with a basket of traditional small-molecule oncology ANDA fillings for the US oncology market and a pipeline of biosimilar cancer drugs (in alliance with Merck Serono) is best placed to grab the upcoming opportunity in the oncology space. Similarly, Biocon, with an advanced pipeline of biosimilar cancer drugs (in alliance with Mylan) and strong biologic R&D and manufacturing capability is well placed to capture the biosimilar-led oncology oppor-tunity across the world. Other leading beneficiaries of the huge oncology opportunity include Sun Pharma (larger focus on advanced market), Cipla, Intas Pharma (unlisted, but has a strong presence in various international markets), and Emcure (largely boosted by in-licensed products from Roche and Novartis).

BIG MYTH: MNCs dominate the Indian oncology market (Rs mn)

Top 5 Indian players account over 50% of revenue generated by top 10 Oncology players in India

Sour

ce: C

ompa

ny


BY ANJALI VERMAG S T

After our detailed research on GST in the September issue of Ground Zero, we hosted a GST seminar with GST guru Dr M Govinda Rao (Member, 14th Finance Commission) and various taxation and sector experts from PwC and Ernst & Young. Dr Rao addressed an extremely informative and incisive hour-long keynote, followed by a two-hour panel discussion to help participants understand GST and its implication on sectors such as retail, consumer, automobile, logistics, and real estate. This article is based on the views shared by all the experts at the event.


“GST will not be flawless” — Dr. M. Govinda Rao

Dr Rao headed a committee in 2001, which was the first attempt at even talking about GST in India. He believes that the implementation of many of his committee’s recommendations does not need a constitutional amendment. GST is an important next-stage reform for taxes in India, but it will not be a game changer and it will certainly not be flawless. A good tax system should reduce three costs – cost of collection, cost for the taxpayer (compliance cost including administration cost and bribe), and cost to the economy in terms of the distortion it brings — higher the rate of tax, more the distortions. A good tax system should have a broad base, low rates, less differentiated rates, and a simple and transparent system.

Too many objectives in tax policy add to problems and invite vested interest. Taxes are meant to raise revenues. Equity in the tax system is necessary for the poor; how-ever, the government cannot possibly promote all vest-ed groups and objectives. Once the differentiated tax structure is created, exemptions and tax base becomes narrow, and the distortions start. For the government, the key objective of taxation should be revenue genera-tion and not to address interests of vested groups.

Importance of GST reform: GST is aimed at relative neutrality – minimum exemptions, less differentiated tax rates, and a broad tax base. It is important because it should improve revenue productivity led by the broad base that it is expected to have. Single GST rate will mean lesser compliance cost. The broad base will mean lower tax rate and lower distortions. Multiple taxes bring huge compliance costs while a single rate reduces this cost.

GST will also promote export competitiveness – the problem with India’s taxation system is that for a long time, both input and output was taxed. This multiple tax

rate led to higher compliance cost and uncompetitive exports. GST will result in common markets across India due to removal of CST and freer movement of goods and services across states. Under GST, destination based tax vs. origin-based tax will result in removal of CST. Vertical integration is possible, thus promoting efficiency.

Current issues with states: Dr Rao believes that there is a trade off between fiscal autonomy and tax disharmony

Compensation: In GST, states are involved and their fiscal autonomy is under threat. Currently, VAT and CST form a crucial part of states’ revenue. In 2008, CST rates were lowered to 2% from 4% and states were promised compensation until 2010, when GST was likely to be rolled out. Since the GST roll out did not take place and CST was already slashed, there is an on-going dis-pute between the centre and states about the amount of compensation (believed to be at Rs 330bn). CST resulted in cascading, thus export competitiveness was impacted.

Federal structure: There is nothing like a flawless GST. We can approach the idea, but do not aim for flawless-ness, because, in the process it may not happen at all (reform itself may be thrown out), believes Dr Rao. The problem in India is its federal structure – There are 31 actors (states and union territories) and the central gov-ernment, with different interests. Other countries, which have a federal structure, have also faced issues in terms of tax rates, implementation, and its impact. Canada is an exemption and is successful because there is only one rate for the state and the centre. Except for Den-mark, EU rates vary from 15% to 29%, with the median rate at 19%. Brazil has various centre and state tax rates and its tax structure is not destination based.

Place of supply rule: States fear that due to the rule of


place of supply, producing states will lose out. The situa-tion is like Coase theorem - beneficial bargains (for both parties), asymmetric information (full information not available in case of GST), and gaming (being done by states). In the current structure, tax-GSDP (Gross State Domestic Product) is at 5% in West Bengal and 11.5% in Karnataka. Such a wide gap is not ideal, because for most of the states, 60% of the revenue comes from VAT, and the nominal VAT rate across states are same (5% and 12.5%) – mostly harmonious. Thus, such a variation in tax-GSDP rates across states is mainly due to adminis-trative efficiency among other things.

Under an average effective neutral tax rate, states such as Karnataka will be key complainants as Karnataka is a large producing state and has developed/invested in infrastructure to support economic activity as well as to get benefit from higher tax revenue. Dr Rao says that states should not complain about this rule, as infrastruc-ture developed by the states is to encourage economic activity and not for tax revenue. However, it is not that easy for states to accept this concept. Producing states want a higher portion of the GST tax revenue.

Threshold, administration: The exemption limits for centre excise duty is currently at Rs 15mn and bringing this threshold level down to Rs 4mn (as recommended by the centre) will increase the burden on small traders who currently do not fall under central taxes. Naturally, states do not want the centre to reduce the threshold. They are worried that small traders will be troubled, because they will have to deal with two tax authorities. States are also demanding some powers in administra-tion (manufacturers/dealers will have to deal with the centre and several states for filing tax).

Other key challenges:

l Constitutional amendment (2/3rd majority, half of states should approve)

l What taxes should be included — petroleum prod-ucts, alcohol, cigarettes, entry tax in lieu of octroi, and purchase tax. List of exemptions

l Threshold – possibly between Rs 3-6mn l Taxation on services, place of supply rules, harmo-

nised administration l IT system – SPV has been established for IT system l GST council – to ensure that everyone follows the

rule and implements it

Dr Rao believes that the most important issue in resolv-

ing GST is the agreement on compensation — there is a defi-cit of trust between the union and states. Rs 110bn, which the centre has agreed to release, should work as a positive signal. Most of the issues highlighted above will be resolved.

Tax rate: Dr Rao does not agree with the reported reve-nue-neutral tax rates of 27%. He believes it is likely to be around 23-24%, which is still on the higher side. In case of single GST rate, SGST should be at 9.6% and CGST at 8.5%. In case of 2-3 tax rates under GST, SGST should be 12.8% and CGST at 12%, thus overall it should not exceed 23-24%.

Indian corporates need to understand that flawless GST is unlikely in India and should appreciate the complex process involved in it. GST will be the next stage of important domes-tic reform. It is a process that will gradually evolve. In 2005, when states shifted to VAT, it was a game changer. GST may not have much of a positive impact on the GDP, as a few research agencies are apparently advising. GST will not be a game changer.

It will be sensible to introduce the GST without delay, and then, based on the revenues and experiences, it can be tweaked. Due to the fact that it is complicated, it is unlikely to be introduced in 2016. It will take at least another 2.5 to 3 years to get it in place. “It will be a Genus like primate” – says Dr Rao.

CEA (Chief Economic Advisor) is worried about a higher revenue-neutral tax rate of 23-24%. Given the fiscal situation, lower tax rate may be a difficult propagation. If real-estate transactions are brought under GST, tax rates may be lowered. When VAT was implemented, compensation (to states) was agreed for three years, but the economy was in an upswing at that time. Even now the economy is picking up, but will it gather the pace seen in the earlier boom?

There will be an improvement in compliance after GST is implemented. Tax credit will be a key benefit in lowering the net tax incidence. That said, tax convergence is possible even without GST – tax credit benefit can be made available even now. Dr Rao says that states can be given concurrent powers to tax services — in return, states will agree to eliminate CST and to the constitutional amendment. More clarity on the place of supply rules along with power to tax services will result in states moving out of VAT and shifting to GST. Consti-tutional amendment will be easily done as states will get ad-ditional tax revenue. Even today, the centre does not have to wait to introduce GST, at least the imperfect one. It can have a common threshold for goods and services, which will offer tax credit benefit to the manufacturers and service providers.


Mr Pinakiranjan Mishra, E&Y’s head of retail and consumer

on GST – “It’s a leap of faith for these sectors.”

One of the big benefits of GST is believed to be warehousing

consolidation, but in today’s context, it may not happen due

to higher demand and warehousing consolidation, which will

require huge logistic and infrastructure changes — Mr Mishra

believes we are not ready for these yet. The second chal-

lenge is that the tax benefits that states give to companies for

setting up manufacturing plants will go away — this will add to

the cost.

Apparels currently attract lower taxes of 0-5%; if they are

included in GST, even at the lowest rate, the sector will be

adversely impacted. Similarly, for the jewellery sector (current-

ly taxed at a lower rate), even a 1% up move can have a huge

impact on consumer demand and companies.

Mr Mishra believes that the most important benefit to the re-

tail sector will be in terms of working capital —the entire GST

will be collected from the consumer (vs. the current structure

of getting only VAT) and GST payment to states and centre

will be made in a month’s time. Therefore, the one-month lag

between collecting from the consumer and paying GST to the

government will help companies to manage working capi-

tal. If managed intelligently, it can give a great boost to the

companies.

Another key benefit for retailers will in terms of the service-tax

set off paid on rentals, which forms a large chunk of compa-

nies’ costs. For the consumer companies, overall tax incidence

will come down. Smaller companies will now come under

GST, but for larger companies it will be a benefit. Supply chain

should improve with removal of octroi/entry taxes – reduction

in taxes is along the expected lines, but unless logistical in-

frastructure is beefed up with investments, supply chain

will remain constrained.

Internal organisational changes – Few people will be

needed, process will be simpler. However, systems will

have to undergo a change, which may not necessarily

be smooth. Under GST, compliance should be easier

and efficient in implementation. Place-of-supply rules,

if not clearly explained, can result in huge litigation for

companies. In the long term, companies will gauge the

real impact, the worry for the sector is that currently

there is not enough information in the hands of the

companies. Changes in pricing, compliance, and admin-

istration will have to take place so that the consumer is

not impacted.

For the consumers, it is possible that tax rate will be

lower under the GST regime. It is expected that com-

panies will pass on the benefits (in time) based on the

savings that accrue under the new regime. Companies

may not be able to retain all the benefits due to the

rising competitive intensity to acquire a larger consumer

base.

Overall, GST is a positive, except for sectors where rates

are currently low. The expectation is that the overall tax

incidence will come down.

Mr Abdul Majeed, PwC, head of automobiles

He believes that GST will help the automotive sector.

This sector contributes significantly to the manufacturing

GDP and indirect tax revenue. Tax rates are currently

very high. Higher tax rates along with poor infrastructure

impact demand. GST should lower tax rates for the mid-

to large-segment cars. It should also add to efficiency

and remove supply bottlenecks, thereby benefiting the


CV industry.

One of the key reasons for muted growth in the

auto industry is higher indirect taxes. Under GST,

tax incidence should come down. Compliance cost

is extremely high currently; after GST, export com-

petitiveness should jump. International automobile

companies are setting up plants in India to meet

with the domestic demand and not to cater to the

global demand. Mr Majeed believes that India should

provide such infrastructure and tax benefits that it can

cater to global demand. Auto dealers will benefit due

to tax set off benefit, as dealers do value addition —

this tax benefit will most likely be passed on to the

consumers. At a GST rate of 20%, bigger cars will

become cheaper by 12-15%.

Challenges – when OEMs manufacture cars, the in-

put is in one particular state while output (cars) goes

to various states. Therefore, inter-state tax settle-

ment will be a key challenge under GST. Valuation of

stock transfers will also be crucial. Biggest dampener

for the automobile industry will be the exclusion of

petroleum products from GST.

GST for real estate, construction, and logistics

“GST is a political ballgame over economic ball

game,” says Mr Sunil Gabhawalla, founder owner of

S B Gabhawalla & Co, a professional services firm

practicing in the field of taxation with a specialisation

in indirect taxes. “This government is best-placed to

introduce it because of its stability. If a human birth

is possible in 9 months, then why can’t a tax regime

be born soon?”

Gabhawalla’s observations:

l Stamp duty should be a parallel levy and not

become a part of GST.

l Within rules for place-of-supply – B2B is clear

(because of flawless credit mechanism), but B2C

will be complex.

l There will be parallel administration due to the

federal structure, dual audits, and dual assess-

ment.

l Flawless credit mechanism: currently CST is the

most important disruption of credit, GST is aimed

at improving credit efficiencies and removing

economic distortions.

l A strong IT network will be crucial.

l Uniformity in tax rates is not likely – multiple tax rates are

more likely. Tax

l Impact on contractors: Neutral to negative, as tax rates

for contractors under GST will move up vs. the current

average incidence of 9-10%.

l Feeder-service providers will suffer as service will become

a part of GST (vs. current service tax rate of 12.5%) – they

will be exposed to the central and state government.

Fundamental rise in service tax rate will be a negative for

all service providers.

l Impact on builders: Unlocking of credit is a theoretical

advantage, but value involved from a tax set off is not

high. Builders currently pay around 10% without credit set

off benefits. If stamp duty is not subsumed, then 5% cost

will continue while benefit from tax set off may not be

substantial, thus negative for builders as well.

l For BoT projects, increase in effective tax rate will be a

negative.

l Logistics planning will be based on business sense and

not tax savings.

Conclusion

GST will not be FLAWLESS and its rollout is expected some-

time in 2017. GST rate is likely around 24%, along with some

exemptions. There could be 4-5 tax brackets – essential com-

modities, precious metals, exemption list, and normal GST.

Retail and automobile sector should benefit. Possibly neutral

for government and consumers. Beneficial for companies —

a long-term positive for EVERYBODY.


A reality check on Indian cement

l North, West & Central regions seem to have

an immediate demand revival. Price hikes are

likely with demand revival in the near term.

l South India continues to remain completely

dependent on pricing discipline. Demand

revival though definite in this region, seems to

be a bit distant. Pricing remains robust here

only on back of strong price discipline.

l East India and North-East India will continue to

benefit from low base and growth numbers will

look exciting. However a lot of fundamental

and macro concerns are yet to be addressed in

these regions especially with regards to availa-

bility of funds, political stability etc.

Demand pull is not yet visible. However,

optimism remains very strong on the ground

for a revival: As expected, there was no material

demand revival in Q3FY15. In terms of demand,

North, Central and West India still remain favourite

regions. Demand sentiment in the South remains

weak and material demand revival is not expected

before the end of June 2015. East and North-East

India numbers may look aggressive on back of low

base.

BY VAIBHAV AGARWALC E M E N T

In the October 2014 issue, Ground Zero had pointed out that yoy growth

numbers seemed unrealistically high in 1HFY15 and that these will start

rationalising and normalising as the base effect starts disappearing.


Growth numbers start appearing realistic: In the

October 2014 issue, Ground Zero had pointed out

that yoy growth numbers seemed unrealistically high

in 1HFY15 and that these will start rationalising and

normalising as the base effect starts disappearing. In

the last couple of months, the growth numbers have

started rationalising. The low base effect will not be

present in FY16, so that year’s yoy growth numbers

will reflect the true picture.

Pricing largely in line with expectations: Cement

prices largely moved in line with expectations,

barring a few recent aggressive price moves (mainly

in South India). In most other regions of the country,

cement prices should correct by ~Rs200/tonne in

Q3FY15. Recently, cement manufacturers in South

India have announced price hikes to the tune of

Rs60/bag and prices in South India now range

between Rs 340-370/bag. Ground Zero understands

from its channel checks that the prices are expected

to move up to Rs 400/bag in South India by January

2015. However, demand-pull seems a bit distant

here and hence sustainability of price hikes remains

questionable. Having said that, the price discipline

in South India appears to be very strong once again

and hence one should not be surprised if prices do

not correct here despite weak demand sentiments.

In other regions of the country, demand-pull is

expected very shortly (especially in West, North and

Central India) and hence current price hikes may

sustain and more price hikes may also follow soon.

Tenders are being floated by various state govern-

ments and the central government for infrastructure

development on the back of which a demand revival

seems to be on the cards in these regions.

Infrastructure projects do not interest all cement

companies: As Ground Zero said in the October

2014 issue, infrastructure projects will dent or dilute

profit margins of cement companies. Company man-

agements also believe that infrastructure projects led

demand may not be very substantial in volume terms

in the near term and unlikely to be remunerative for

all cement manufacturers. Hence, all cement com-

panies may not have similar aggression levels and

the inclination to bid and supply to infrastructure

projects. Infrastructure projects may help cement

companies to have efficiency gains with higher ca-

pacity utilisations, but are unlikely to boost margins,

as supplies to such projects are usually at significant-

ly discounted prices. However, for the industry as a

whole, a boost from infrastructure is essential. Feed-

back suggests that smaller cement manufacturers are

more excited about infrastructure projects and hence

these players will be more aggressive in bidding

for tenders for such projects. The larger segment of

demand viz, housing, hence gets opened up for the

relatively larger cement manufacturers thereby may

improve profitability of higher tier cement manufac-

turers or players who remain focused on the housing

segment.

Lower costs may expand near to medium term

operating margins: With a correction in crude

prices, cement companies may see costs easing off

marginally (by about Rs 100-200/tonne). This will be

an added advantage for cement manufacturers and

will help improving profit margins in near to medium

term.

Year-on-year growth

Sour

ce: I

ndus

try



Indian Economy – Trend Indicators

Monthly Economic Indicators

Quarterly Economic Indicators

Growth Rates (%) Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14

IIP -1.2 -1.3 0.1 1.1 -2.0 -0.5 3.7 5.6 4.3 0.9 0.5 2.8 2.8 -

PMI 49.6 51.3 50.7 51.4 52.5 51.3 51.3 51.4 51.5 52.2 50.6 51.0 51.6 53.3

Core sector -0.6 1.7 2.1 1.6 4.5 2.5 4.2 2.3 7.3 2.7 5.8 1.9 6.9 -

WPI 7.2 7.5 6.4 5.1 5.0 6.0 5.5 6.2 5.7 5.4 3.9 2.4 1.8 0.0

CPI 10.2 11.2 9.9 8.8 8.0 8.3 8.6 8.3 7.5 8.0 7.7 6.5 5.5 4.4

Money Supply 13.0 14.5 14.9 14.5 14.5 13.5 13.9 13.2 12.2 12.7 13.0 12.7 12.0 11.4

Deposit 14.4 16.1 15.8 15.7 15.9 14.6 15.1 13.8 12.2 12.7 13.2 13.0 12.4 11.7

Credit 16.6 15.5 14.5 14.7 14.4 14.3 14.1 12.8 13.1 13.1 10.6 9.4 10.8 10.7

Exports 14.3 4.1 3.5 3.8 -3.7 -3.2 5.3 12.4 10.2 7.3 2.4 2.7 -5.0 7.3

Imports -13.9 -16.5 -15.2 -18.1 -17.1 -2.1 -15.0 -11.4 8.3 4.3 2.1 26.0 3.6 26.8

Trade deficit (USD Bn) -10.6 -9.6 -10.1 -9.9 -8.1 -10.5 -10.1 -11.2 -11.8 -12.2 -10.8 -14.2 -13.4 -16.9

Net FDI (USD Bn) 2.0 2.4 1.9 0.4 -0.1 2.1 2.0 4.8 2.4 3.6 2.5 2.9 2.8 -

FII (USD Bn) -0.4 0.0 2.9 2.6 1.5 5.4 -0.1 7.7 4.8 5.4 2.1 2.4 1.7 -

ECB (USD Bn) 1.9 2.2 4.6 1.8 4.3 3.6 3.2 1.5 1.9 3.7 0.5 3.2 2.8 -

NRI Deposits (USD Bn) 61.6 62.6 61.9 62.1 62.2 61.0 60.4 59.3 60.2 60.1 60.9 61.8 61.4 62.0

Dollar-Rupee 283.0 291.3 295.7 292.2 294.4 303.7 309.9 312.4 315.8 320.6 318.6 314.2 315.9 314.9

FOREX Reserves (USD Bn) 275.5 276.3 283.0 291.3 295.7 292.2 294.4 303.7 309.9 312.4 315.8 320.6 318.6 0.0

Balance of Payment (USD Bn) Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15Exports 72.6 74.2 84.8 73.9 81.2 79.8 83.7 81.7 85.3Imports 120.4 132.6 130.4 124.4 114.5 112.9 114.3 116.4 123.8Trade deficit (47.8) (58.4) (45.6) (50.5) (33.3) (33.2) (30.7) (34.6) (38.6)Net Invisibles 26.7 26.6 27.5 28.7 28.1 29.1 29.3 26.8 28.5CAD (21.1) (31.8) (18.2) (21.8) (5.2) (4.1) (1.3) (7.9) (10.1)CAD (% of GDP) 5.1 6.5 3.5 4.9 1.2 0.8 0.3 1.7 2.1Capital Account 20.7 31.5 20.5 20.6 (4.8) 23.8 9.2 19.8 18.7BoP (0.2) 0.8 2.7 (0.3) (10.4) 19.1 7.1 11.2 6.9

GDP and its Components (YoY, %) Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15Agriculture & allied activities 1.8 0.8 1.6 4.0 5.0 3.7 6.3 3.8 3.2 Industry 0.1 2.0 2.0 (0.9) 1.8 (0.9) (0.5) 4.0 1.2 Mining & Quarrying (0.1) (2.0) (4.8) (3.9) - (1.2) (0.4) 2.1 1.9 Manufacturing (0.0) 2.5 3.0 (1.2) 1.3 (1.5) (1.4) 3.5 0.1 Electricity, Gas & Water Supply 1.3 2.6 0.9 3.8 7.8 5.0 7.2 10.2 8.7 Services 6.5 6.1 5.8 6.5 6.1 6.4 5.8 6.6 6.8 Construction (1.9) 1.0 2.4 1.1 4.4 0.6 0.7 4.8 4.6 Trade, Hotel, Transport and Communications 5.6 5.9 4.8 1.6 3.6 2.9 3.9 2.8 3.8 Finance, Insurance, Real Estate & Business Services 10.6 10.2 11.2 12.9 12.1 14.1 12.4 10.4 9.5 Community, Social & Personal Services 7.4 4.0 2.8 10.6 3.6 5.7 3.3 9.1 9.6 GDP at FC 4.6 4.4 4.4 4.7 5.2 4.6 4.6 5.7 5.3


Annual Economic Indicators and Forecasts Indicators Units FY6 FY7 FY8 FY9 FY10 FY11 FY12 FY13 FY14E FY15E

Real GDP growth % 9.5 9.6 9.3 6.7 8.6 8.9 6.7 4.5 4.7 5.7

Agriculture % 5.1 4.2 5.8 0.1 0.8 8.6 5 1.4 4.7 2.2

Industry % 8.5 12.9 9.2 4.1 10.2 8.3 6.7 0.9 (0.1) 3.5

Services % 11.1 10.1 10.3 9.4 10 9.2 7.1 6.2 6.0 7.0

Real GDP Rs Bn 32,531 35,644 38,966 41,587 45,161 49,185 52,475 54,821 57,418 60,691

Real GDP US$ Bn 733 787 967 908 953 1,079 1,096 1,008 950 1,012

Nominal GDP Rs Bn 36,925 42,937 49,864 56,301 64,778 77,841 90,097 101,133 113,551 127,643

Nominal GDP US$ Bn 832 948 1,237 1,229 1,367 1,707 1,881 1,859 1,878 2,127

Population Mn 1,106 1,122 1,138 1,154 1,170 1,186 1,202 1,219 1,236 1,254

Per Capita Income US$ 753 845 1,087 1,065 1,168 1,439 1,565 1,525 1,519 1,697

WPI (Average) % 4.5 6.6 4.7 8.1 3.8 9.6 8.7 7.4 6.0 3.5-4

CPI (Average) % 4.2 6.8 6.4 9 12.4 10.4 8.3 10.2 9.5 7.0

Money Supply % 15.5 20 22.1 20.5 19.2 16.2 15.8 13.6 13.5 14.0

CRR % 5 6 7.5 5 5.75 6 4.75 4.0 4.0 4.0

Repo rate % 6.5 7.5 7.75 5 5 6.75 8.5 7.5 8.0 8.0

Reverse repo rate % 5.5 6 6 3.5 3.5 5.75 7.5 6.5 7.0 7.0

Bank Deposit growth % 24 23.8 22.4 19.9 17.2 15.9 13.5 14.4 14.6 15.0

Bank Credit growth % 37 28.1 22.3 17.5 16.9 21.5 17.0 15.0 14.3 16.0

Centre Fiscal Deficit Rs Bn 1,464 1,426 1,437 3,370 4,140 3,736 5,160 5,209 5,245 5,312

Centre Fiscal Deficit % of GDP 4 3.3 2.9 6 6.4 4.8 5.7 5.2 4.6 4.1

Gross Central Govt Borrowings Rs Bn 1,310 1,460 1,681 2,730 4,510 4,370 5,098 5,580 5,639 5,970

Net Central Govt Borrowings Rs Bn 954 1,104 1,318 2,336 3,984 3,254 4,362 4,674 4,689 4,573

State Fiscal Deficit % of GDP 2.4 1.8 1.5 2.4 2.9 2.1 2.3 2.2 2.5 2.5

Consolidted Fiscal Deficit % of GDP 6.4 5.1 4.4 8.4 9.3 6.9 8.1 7.4 7.1 6.6

Exports US$ Bn 105.2 128.9 166.2 189.0 182.4 251.1 309.8 306.6 318.6 331.4

YoY Growth % 23.4 22.6 28.9 13.7 -3.5 37.6 23.4 -1.0 3.9 4.0

Imports US$ Bn 157.1 190.7 257.6 308.5 300.6 381.1 499.5 502.2 466.2 482.0

YoY Growth % 32.1 21.4 35.1 19.7 -2.5 26.7 31.1 0.5 -7.2 3.4

Trade Balance US$ Bn -51.9 -61.8 -91.5 -119.5 -118.2 -129.9 -189.8 -195.6 -147.6 -150.6

Net Invisibles US$ Bn 42.0 52.2 75.7 91.6 80.0 84.6 111.6 107.5 115.2 114.9

Current Account Deficit US$ Bn -9.9 -9.6 -15.7 -27.9 -38.2 -45.3 -78.2 -88.2 -32.4 -35.7

CAD (% of GDP) % -1.2 -1.0 -1.3 -2.3 -2.8 -2.6 -4.2 -4.7 -1.7 -1.7

Capital Account Balance US$ Bn 25.5 45.2 106.6 7.8 51.6 62.0 67.8 89.3 48.8 59.5

Dollar-Rupee (Average) 44.4 45.3 40.3 45.8 47.4 45.6 47.9 54.4 60.5 60.0

Source: RBI, CSO, CGA, Ministry of Agriculture, Ministry of commerce, Bloomberg, PhillipCapital India Research


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Sun

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Hind

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Inds

Met

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3.7

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1.9

1.7

6.8

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18.6

16.8

18.6

16.7

Tata

Ste

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Met

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Met

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7.7

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9.7

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5.7

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etal

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21,

545

65,

531

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919

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1,5

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15.

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1

ONGC

Oil &

Gas

404

3,4

58,5

57

1,7

32,3

45

1,8

85,0

87

549

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6

34,5

77

265

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2

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63

31.0

34.2

9.4

10.5

13.0

11.8

2.0

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6.7

5.6

15.4

15.3

11.2

10.6

Petro

net L

NGOi

l & G

as19

9 1

49,3

25

377

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56.5

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4.6

5.0

0.9

0.8

3.6

3.6

20.6

16.5

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16.1

GAIL

Oil &

Gas

515

652

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72,4

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585

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6

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515

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Note

: For

ban

ks, E

BITD

A is

pre-

prov

ision

pro

fit

Phill

ipC

apita

l Ind

ia C

over

age

Uni

vers

e: V

alua

tio

n Su

mm

ary

CMP

Mkt

Cap

Ne

t Sal

es (R

s mn)

EB

IDTA

(Rs

mn)

PAT (

Rs m

n)EP

S (R

s)

EPS

Grow

th (%

) P

/E (x

) P

/B (x

) EV

/EBI

TDA

(x)

ROE

(%)

ROCE

(%)

Nam

e of

com

pany

Sect

orRs

Rs m

nFY

14E

FY15

EFY

14E

FY15

EFY

14E

FY15

EFY

14E

FY15

EFY

14E

FY15

EFY

14E

FY15

EFY

14E

FY15

EFY

14E

FY15

EFY

14E

FY15

EFY

14E

FY15

E

Indr

apra

stha

Gas

Oil &

Gas

397

55,

545

39,

174

46,

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7,7

76

8,3

97

3,6

03

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52

25.7

28.9

1.7

12.5

15.4

13.7

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2.7

7.4

6.5

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21.4

16.0

15.8

Guja

rat S

tate

Pet

Oil &

Gas

98 5

5,15

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4

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47.

2-2

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13.2

13.5

1.7

1.5

6.9

6.9

12.7

11.2

10.0

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Oil I

ndia

Oil &

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631

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Ltd

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21.7

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Have

lls Lt

dOt

her

285

178

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22.6

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onPh

arm

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ma

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torie

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Ipca

Labo

rato

ries

Phar

ma

740

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31,

994

35,

196

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42.1

42.6

34.1

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17.4

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11.6

26.9

21.7

19.7

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nPh

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028

35,

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49.2

38.1

20.1

33.2

27.6

8.8

6.9

20.3

16.7

26.5

25.0

36.4

34.2

Sun

Phar

ma

Phar

ma

837

1,7

33,8

25

160

,372

1

79,1

98

72,

285

76,

001

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526

52,

590

25.8

25.4

47.3

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33.0

9.2

7.4

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22.6

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Phoe

nix

Mill

s Re

al E

state

383

55,

499

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485

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219

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1,2

00

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73.9

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26.6

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2.6

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Real

Esta

te12

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82,

980

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854

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413

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714

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53.

8

Unite

ch Lt

dRe

al E

state

21 5

3,59

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9,33

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2,50

5 1

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3

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6

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3,3

77

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1.3

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838

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15.9

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2.0

Ober

oi R

ealty

Real

Esta

te24

7 8

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19.3

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7.1

9.1

7.1

10.2

Futu

re R

etai

lRe

tail

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508

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09

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(1)

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7.6

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Shop

pers

Sto

pRe

tail

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45,

361

37,

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(75)

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Raym

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Ltd

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15.2

20.0

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82,

579

20,

319

23,

395

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3,6

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20.0

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tail

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tail

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ti Ai

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Tele

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06.

1

Relia

nce

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mTe

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13,

534

5.5

6.6

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15.8

0.8

0.8

8.9

7.4

4.2

4.8

4.3

4.2

Bhar

ti In

frate

lTe

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m29

0 5

48,2

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65,

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73,

300

44,

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49,

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8.1

9.4

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16.5

36.0

30.9

3.0

3.0

13.2

10.9

8.4

9.6

7.3

7.7

Idea

Cel

lula

rTe

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m16

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com

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8

Tata

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mun

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2

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607.

732

1.7

45.5

14.2

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Conc

orLo

gisti

cs13

50 2

63,2

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49,

846

58,

489

11,

019

13,

416

9,8

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11,

569

50.5

59.3

4.8

17.5

26.7

22.8

3.8

3.3

21.6

17.6

14.1

14.7

13.8

14.6




Disclosures and Disclaimers

PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or complete-ness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance.

This report does not have regard to the specific investment objec-tives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommen-dations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report.

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months.

PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own deter-mination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strate-gy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results.

Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permit-ted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances.

For U.S. persons only: This research report is a product of Phillip-Capital (India) Pvt Ltd. which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities andExchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapi-tal (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer

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