Knight Frank

Industry Report 2008

Research

Industry Report
2008

Industry Report 2008

Knight Frank

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Knight Frank

Industry Report 2008

01

Contents
Executive summary ...................................................................................................................2 Overview ...................................................................................................................................4
• Industrial Park/Industrial Estate.................................................................................................................................................................5 • Special Economic Zone ............................................................................................................................................................................6 • Logistics and Warehousing.......................................................................................................................................................................7

Industrial sector ........................................................................................................................9
• North.......................................................................................................................................................................................................9 • East........................................................................................................................................................................................................10 • South.....................................................................................................................................................................................................10 • West ......................................................................................................................................................................................................12

Special Economic Zone............................................................................................................14 Logistics and Warehousing .....................................................................................................17
• Investment scenario in logistics sector....................................................................................................................................................17 • Regulatory framework governing logistics and warehousing operations in India.....................................................................................18 • North.....................................................................................................................................................................................................19 • East........................................................................................................................................................................................................21 • South.....................................................................................................................................................................................................22 • West ......................................................................................................................................................................................................24 • Brief on major infrastructure projects in India .........................................................................................................................................26 • Case Study: Transport Corporation of India Limited (TCI).......................................................................................................................30

Outlook ....................................................................................................................................33 Glossary ...................................................................................................................................38 Bibliography ............................................................................................................................39 Annexure .................................................................................................................................40
State comparison chart .............................................................................................................................................................................40

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Executive Summary
India has emerged as one of the prime investment destinations of the world in recent years. Led by strong economic growth, India today stands as the 10th largest economy in the world and 4th largest in terms of Purchasing Power Parity. The country has a large reservoir of skilled manpower at internationally competitive cost owing to the presence of a number of technical and management institutions of global standards. This, coupled with a large entrepreneurial base and a diversified manufacturing structure, makes it easy to attract investments into the country. A vibrant economy with a large democratic setup, a broad based legal framework including arbitration and an independent judicial system along with a vast network of bank branches, financial institutions and well-organised capital and money markets makes India a favourable destination for investments. More importantly, India has always met its international financial obligations as per schedule and has never been a defaulter. Strategic location of the country for the third world markets particularly for the rapidly growing South and South East Asian countries together with a supportive infrastructure base helps in generating a healthy environment for Foreign Direct Investments (FDI) inflow into the country. The Indian economy is predicted to become one of the world's largest by 2050 A.D, this is based on a strong GDP growth rate of above 8% initiated by a rebound in Indian agriculture and presently being boosted by a boom in manufacturing and service industries. As many as 15 industries out of 17 have shown positive growth in February since the past year. Jute, vegetable, fibre and textile sectors showed the highest growth of 86.4% followed by 18.8% in leather and fur products, and 18.2% in metal products and parts category. The power sector is witnessing a steady growth of 9.8%, while the manufacturing sector is witnessing a slight slowdown in growth, which was 8.6% in February 2008 as against 12% during the same period last year. Capital goods, the key sector for industrial growth, grew at 10.4% in February as against 2.1% in January, in 2008. In the first 11 months of 2007-08, the growth in this sector was 17.5%, compared to 18.3% in the same period last year. In order to further improve the country's export and attract FDI, the concept of Special Economic Zones (SEZs) was introduced in 2000 by the government. SEZs are pockets of manufacturing excellence which also contribute tremendously to the generation of employment and eventually to the economic growth of the country. The SEZ policy framework comprise attractive package of incentives, including several fiscal concessions for the developers of the SEZ and the units to be set up in these SEZs. It has been observed that the private sector has limited experience in development of these zones, hence most projects are developed under the public-private partnership format, where the state governments concerned jointly market the zone along with the private developer. India's advantage lies in its strong economic growth prospects, availability of large and skilled workforce, comparative advantage in several industries, a strong policy framework, availability of supporting ancillary industries, strong growth in the external sector and a huge domestic market. These factors, combined with a proactive government in marketing the SEZs, will go a long way in providing the much-needed momentum in development of SEZs and in attaining the objective of boosting India's exports and attracting export related FDI. Logistics and warehousing is another segment which have been witnessing considerable growth in the past couple of years. The sector is expected to grow at a Compounded Annual Growth Rate (CAGR) of 6.4% from 2005 to 2012. The entry barriers for providing logistics services in India are rather low and thus increased competition is expected in the near future. With companies keen to outsource their back-end processes, more corporations are getting into the business of providing organised logistical services by the way of Third Party Logistics (3PL). This segment is expected to grow at a CAGR of 21.9% from 2005 to 2012. Companies in India generally outsource only a part of their supply chain requirements to a 3PL service provider; only a small fraction of companies outsource entirely to a 3PL service provider. Most of these companies are multinationals who do not have an established network in the country and have to outsource their logistics due to the lack of assets. The degree and nature of outsourcing of logistics to a 3PL service provider varies significantly between verticals and depends greatly on the nature of the company. In the automotive sector, the trend of end-to-end outsourcing is beginning to significantly catch up as companies have realised the benefits of concentrating on core competencies and delegating the logistics to 3PL service providers. In recent times, the IT hardware and electronics sectors have also begun outsourcing to 3PL service providers to a great extent. In sectors such as Fast Moving Consumer Goods (FMCG) and pharmaceuticals, the penetration of the 3PL concept has been fairly low, owing to already strained profit margins. Added to this, there is a great deal of decentralisation in the supply chains of these sectors, with many stocking points and strategic distribution centres spread all across the country. A large number of investment funds are contributing to the growth of logistics companies in the country with current investment figures standing at Rs. 9.14 billion. Going forward, the warehousing facilities of a 3PL provider are expected to be the differentiating factor for the service providers. The warehousing segment is expected to grow the fastest among all the logistics functions outsourced to a 3PL service provider. Currently, it accounts for just 8% of the market share. With improvement in the overall infrastructure in the country, there is good scope for development of warehousing facility corridors across the country. The phasing out of Central Sales Tax (CST) and the implementation of Value Added Tax (VAT) is expected to give further impetus to the sector. Currently the industrial sector is considered to be facing a crisis, the implications of which would be felt in SEZ developments, but the effect is yet to translate into the logistics and warehousing segments. The current slump in industrial production growth figure which has gone down to 3% is much lower than the figure of 8.6% witnessed in February and does not bode well for the industry as the earlier apprehension of a major slowdown is gradually turning into reality. These factors have been kept in mind while preparing the research review. The objective of this review is to understand the market scenario of the industrial sector from a real estate perspective with special focus on SEZs and Logistics and Warehousing segments. In the process we have analysed the demand-supply dynamics within various sectors throwing light on the current market scenario as well as outlining the growth prospects for the future.

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The approach followed for the review involved studying established and growing markets within the country with respect to the above mentioned sectors, primary data survey and analysis along with interaction with representatives of major corporations in the sectors concerned.

Methodology
This report has been divided into three sections namely overview, zonal classification and outlook. The first section is a prelude to the report and gives an introduction into each of the sectors highlighting key economic aspects giving brief descriptions of the same. The second section gives an overview of the industrial sector, SEZs and 3PL focusing on their development and salient features. The section is divided into three segments and each of them has been discussed separately. In the first segment the industrial sector of the country has been divided into four zones based on its geographical location. It describes each zone in detail, the key industries present and their investment potential, also stating the indications as to the factors driving these industries. In the second segment the impact of the SEZs is discussed on a pan-India basis with emphasis on its current status and where it is heading. It also reviews the current regulatory framework with respect to the sector. The third segment gives a snapshot of the logistics and warehousing sector in the country with a close look on the current market condition and factors driving the sector. Here, like in the first segment, the sector has been divided into four zones based on geography. A case study of a prominent logistics player has also been included in the report to illustrate the sector market. The final segment features the outlook, which analyses the current status and future potential of each of the three sectors with respect to present economic conditions, business potential and growth. This information has been used to arrive at a comparative analysis of the logistics market potential among developing economies. It also gives an insight into the strengths and weaknesses of the sectors.

Zones selected for the Industry Report

NORTH ZONE WEST ZONE EAST ZONE SOUTH ZONE

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Overview
India has been following a highly protective industrial and foreign trade regime since 1951. The liberalisation of Indian economy started gradually in the 1980's with major structural adjustment programs beginning from 1991. Key economic reforms were undertaken with the objective of transforming regulated economic development to a competitive regime for accelerating economic growth. With positive indicators such as a stable 8-9% annual growth, rising foreign exchange reserves, a booming capital market and rapidly expanding FDI inflows, India has emerged as the second fastest growing major economy in the world. The Indian economy has been growing at an average growth rate of 8.8% in the last four fiscal years (2003-04 to 2006-07), with the 2006-07 growth rate of 9.6% being the highest in the last 18 years. Significantly, the industrial and service sectors have been contributing towards a major part of this growth, suggesting the structural transformation underway in the Indian economy. Industrial and services sectors have logged in a 10.63% and 11.18% growth rate in 2006-07 respectively, as against 8.02% and 11.01% in 2005-06. Similarly, manufacturing grew by 8.98% and 12% in 2005-06 and 2006-07 and transport, storage and communication recorded a growth of 14.65% and 16.64%, respectively. Another significant feature of the growth process has been the consistently increasing savings and investment rate. While the gross saving rate as a proportion of GDP has increased from 23.5% in 2001-02 to 34.8% in 2006-07, the investment rate-reflected as the gross capital formation as a proportion of GDP-has increased from 22.8% in 2001-02 to 35.9% in 2006-07. Financial reforms, coupled with improved infrastructure, are the key factors for this growth. After agriculture it is the industrial sector which is in a transformation phase from being labour intensive to technology and efficiency enhancement intensive. India is set to reframe its economic structure inducing technological advancements along with industrial friendly policies. These initiatives are expected to go a long way in promoting industrial growth in the country.

Fact file
! ! ! ! ! ! ! ! Overall industrial production grew by 9% in Q1 and Q2 2007, whereas capital goods production rose by 20.2% compared to 18.6% during same period in 2006 Manufacturing grew by 9.6% during Q1 and Q2 2007, on the back of 12.2% growth during same period in 2006-07 Core infrastructure sector continued its growth rate recording 6% growth in Q1 and Q2 2007 Exports grew by 21.76% during Q1 and Q2 2007, imports increased by 25.97% in the same period Central Statistical Organisation (CSO) expects the economy to grow by 8.7% in 2007-08 Warehousing and packaging contributes, 26% of the logistics cost in India Average escalation in warehousing costs between 2001-2006, has been maximum for the steel industry followed by pharmaceutical and auto industries India spends 13-14% of its GDP on logistics cost, whereas this figure is 7-8% for developed countries

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Industrial Park/Industrial Estate
“Industrial Park” means a project in which plots of developed space or built up space or a combination with common facilities and quality infrastructure facilities, is developed and made available for the purposes of industrial or commercial activities. Any undertaking which develops, develops and operates or maintains and operates an industrial park may make an application for notification under clause (iii) of sub-section (4) of section 80-IA of the Act. The Central Board of Direct Taxes shall process the application for approval and notification by the Central Government and for this purpose it may call for reports from other departments or agencies, as it may deem fit.

Table 1: Classification of Industrial Parks
Type of industrial park Minimum Number of units to be provided in the Industrial Model Town/Industrial Park/Growth Centre 50 units 30 units 30 units

(i) Industrial Model Town (ii) Industrial Park (iii) Growth Centre

Fact file
An industrial park is divided according to the following activities • Industrial activity • Common facility • Commercial activity • Infrastructural facility

Industrial Park Scheme, 2008
The scheme extends 100% tax holiday on profits derived by an undertaking from the activity of developing, developing and operating, or maintaining and operating an Industrial Park and is applicable to all Industrial Parks set up between April 1, 2006 and March 31, 2009.

Criteria for approval
(1) The date of commencement of the Industrial Park should be on or after the 1st day of April 2006 and not later than 31st of March 2009 (2) The area allocated or to be allocated to industrial units shall not be less than 90% of the allocable area (3) There shall be a minimum of thirty industrial units located in an industrial park (4) For the purpose of computing the minimum number of industrial units; all units of a person and his associated enterprises will be treated as a single unit (5) The minimum constructed floor area shall not be less than 50,000 sq.mt. (6) No industrial unit, along with the units of an associated enterprise, shall occupy more than 25% of the allocable area (7) The industrial park should be owned by only one undertaking (8) Industrial units shall undertake only manufacturing activity as defined in section D of the National Classification, 2004, Code issued by the Central Statistical Organisation, Department of Statistics

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Special Economic Zones (SEZs)
As defined in EXIM Policy 2000, Special Economic Zones (SEZs) in India are defined as: “A specifically delineated duty-free enclave which shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs” SEZs in India have evolved from the erstwhile Export Promotion Zones (EPZ) which were introduced in 1965. The first EPZ was set up at Kandla, Gujarat, followed by another one at Santacruz, Mumbai in 1973. The present shape of SEZs began taking place in the early 1990's, when wide ranging measures were initiated by the government for revamping and restructuring EPZs. This was continued in the Exim Policy (1997-2002), which formally introduced the term SEZ, followed by the announcement of SEZ Act of 2005, which supported by the SEZ rules came into effect in 2006. Given below is a flowchart which highlights the processes involved for the setting up of an SEZ:

Process flowchart for setting up a Special Economic Zone (SEZ)
Application submitted to Chief Secretary of State with details on · Status report of applicant, nature of SEZ · Location details of proposed SEZ, infrastructure plan · Financial details, investment plan (min. outlay Rs.1 billion)

• Environment clearances • Commitment on exemption of taxes on power, sales tax, duty and cess from DTA products

• Proposal forwarded to Deptt of Commerce, Govt. of India • Review of proposal by inter-ministerial committee • Permission

• Approval committee issues LOA (valid for 1 year) • Entitlement to unit approved in processing zone/FTWZ

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Logistics and Warehousing
Logistics is the management of the flow of goods, information and other resources, including energy and people, between the point of origin and the point of consumption in order to meet the requirements of consumers (frequently, and originally, military organisations). Logistics involve the integration of information, transportation, inventory, warehousing and material-handling. Warehouse on the other hand is defined as a commercial building for storage of goods predominantly used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They come equipped with loading docks to load and unload trucks or sometimes are loaded directly from railways, airports or seaports. They use cranes and forklifts for moving goods, which are usually placed on standard pallets. The logistics and warehousing business is considered to be the backbone of industrial development. The Indian logistics business is valued at Rs.596.82 billion and has been growing at a CAGR of 7-8%. As mentioned earlier, the logistics cost represents 13-14% of the country's GDP. The market is fragmented with thousands of players offering partial services in logistics; it is estimated that there are about 400 firms capable of providing some level of integrated service. The economy is expected to grow around 10% over the next ten years and sectors like chemicals, petrochemicals, pharmaceuticals, metals and metal processing, FMCG, textile, retail and automobile are projected to grow the fastest. New business models are emerging with the advent of new firms, both domestic and foreign, into the market. As a result of the ensuing competition, linkages with global supply chains and domestic market growth promise to bring over a sea change in to the logistics industry.

Overview of India's container freight segment
Containerised cargo represents about 30% by value and 55% by volume of India's external trade and this proportion is growing rapidly. Globally, 75-80% of trade by volume happens through containers. India's container cargo traffic is estimated to reach 21 million Twenty feet Equivalent Units (TEUs), a year by 2016. The estimated growth rate for the same stands at around 18-19%.

Traffic handled at major ports in India
60000 50000 Total Cargo (’000 tonnes) 40000 30000 20000 10000 0

Ha ld ia

Ko lka ta co m pl e Pa x Vi sh ra ak di p ha pa tn am En no r Ch e en na i Tu tic or in Co N ew ch in M an ga lo M re ar m ag oa M um ba i JN PT Ka nd la do ck
April-Dec 2006 April-Dec 2007
Source: Government of West Bengal (Annual Report 2006-07)

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Container Traffic volumes have been on the decline for a couple of years but it has now started to move towards its original rate of growth, as witnessed from the graph below:

Container Traffic Growth in India
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2003-04 2005-06 2006-07

Percentage (%)

Container Traffic Growth
Source: News Publications The reason for the decline in the container traffic movement in the last 2 years can be attributed to the fact that about 56% of the port development projects announced had not been initiated on time but with development works currently underway port traffic volumes have gone up considerably. With the increase in movement of container traffic in India and the existing gap between demand and supply for logistics service providers, a large number of smaller firms have started to aim for a bigger profile. Over the last few years, a large number of PE funds have, invested into many of these companies. Also companies like VRL Logistics, DRS and Premier Logistics are planning initial public offers. However, recently a capacity crunch has been hampering external trade, in terms of handling cargo, raising transaction costs and delaying the time taken for exports and imports. Approximately 95% of the country's external trade by volume, and 70% by value, moves by sea. Notably, the country's biggest port, Jawaharlal Nehru Port (JNPT), located at Navi Mumbai, accounts for more than 60% of India's container cargo traffic of about 7.5 million TEUs. The situation here has reached a critical stage in terms of demand surpassing the space required. Similarly, each of the three terminals at JNPT is operating at 110-120% of their capacity.

Fact file
! ! ! ! According to the World Bank, it costs Rs. 49,196.12 for importing a cargo container into India and Rs.35,137.62 for exporting one from India It takes Rs.15,726.23 for importing a container into Singapore while it costs Rs. 16,711.56 for exporting a container from China It takes 21 days each for importing or exporting a container into or out of India It takes 3 days to import a container into Singapore and just 5 to export one from Denmark

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Industrial Sector
Overview of the Zones
In order to facilitate our study and to aid the reader's understanding, we have divided the country into four zones, namely North zone, South zone, East zone and West zone. The states which have been short listed for each zone has been done with regard to their industrial presence and potential for development. After analysing the data received from the respective state industrial development corporations regarding current industrial activity and the proposed developments/new estates, and also taking into account other favourable factors like good connectivity, proximity to the consumer market, ease of transportation of the raw materials and good infrastructure, locations with high and medium potential for industrial development have been concluded for each of the said zones.

North Zone
The states which have been selected from this region are Delhi, Haryana, Uttar Pradesh and Rajasthan. Being the most prosperous economy in the country, Delhi has benefited significantly from the rapid economic growth in India during the past decade. Its superior infrastructure and proximity to the central government is a major attraction for foreign and domestic investors to locate themselves in the city. Its status as a city-state provides ample business and investment opportunities, particularly in the services sector. The industrial sector in the region is currently growing at 5.7% per annum.

• Delhi
Delhi has developed 28 industrial estates through the Delhi State Industrial Development Corporation (DSIDC) and the Industries Department. Besides, the Delhi government is building an IT park with an initial investment of Rs.692.66 million. It proposes to set up a World Trade Centre to promote international trade and commerce at the same park. DSIDC plans to develop industry specific industrial estates for apparels, gems and jewellery. The proposed gem and jewellery park will be spread over 2 acres and will be set up at Okhla. It will be developed through private sector participation. The government has acquired 2,100 acres of land to develop new industrial estates in Bawana and Holambi Kalan. The new industrial estate at Bawana has been almost fully developed with the provision of necessary infrastructure. 18,360 plots/flats have been allotted to the industrial units. Further, around 175 hectares of land at Bhorgad has been acquired for development of a new industrial area.

• Haryana
With a Net Domestic Product of over Rs.299.25 billion, Haryana's economy is the 13th largest in the country. Geographically one of the smallest states in India, covering an area of 1.37%, it enjoys a locational advantage being situated in the National Capital Region (NCR), a prominent trade and commerce centre. In recent years, the areas of Haryana surrounding Delhi have seen a surge in economic activity with Gurgaon emerging as the principal suburban township of Delhi. Haryana has developed 103 industrial estates through its development agencies. The industrial estates in the state are being developed by Haryana State Industrial Development Corporation (HSIDC), Haryana Urban Development Authority (HUDA) and private developers. To facilitate coordinated development of infrastructure and participation of private sector including FDI, the HSIDC is designated to be the nodal agency for infrastructure development and it is proposed to redesignate it as 'Haryana State Industrial and Infrastructure Development Corporation' (HSIIDC).

• Uttar Pradesh (UP)
Uttar Pradesh has 129 industrial areas and ranks third in the number of industrial parks at 89, extending over a total area of 38,000 acres. The state has developed integrated industrial areas of Noida and Greater Noida in proximity to New Delhi with state-of-the-art industrial and domestic infrastructure. UP has an Export Promotion Zone at Noida and two others at Moradabad and Kanpur are under implementation. The state has a well-developed agro-based industry and has four Agro Export Zones fostering better exports of agricultural products. Being the largest producer of sugar cane, UP is considered to be India's sugar bowl, accounting for 28.03% of the country's total sugar production. Agricultural affluence in the region has led to the growth of allied industries like cold storages and warehousing. In addition to industrial areas, many centres like Kanpur, Ghaziabad and Lucknow have their own established traditional industries. The presence of large livestock population has led the leather industry to flourish in the state. Kanpur and Agra has emerged as the hubs for leather goods in the country. Textile industry is another promising sector in the state. Besides, UP is also the largest producer of electronic goods and the fourth largest exporter of software products in the country. Notably, UP accounted for nearly 10% of IT and BPO exports from the country in 2003-04. With a productive and cost effective manpower, the state has attracted some of the largest MNCs to set-up their manufacturing facilities, companies like Coca-Cola, Pepsi, Glaxo, Daewoo, Honda and Piaggio to name a few. The state with its human resource potential, proactive policies and commitment to ensure encouraging climate to the investors is poised to emerge as a manufacturing hub in the country. The state has become a hub for corporate R&D with many domestic players and MNCs establishing their facilities.

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• Rajasthan
The key industries in Rajasthan include mineral based industries, textile, tourism and gems and jewellery. Rajasthan enjoys a distinct advantage in these sectors. It is also the leading producer of cement and metals such as copper, zinc and lead and the largest producer of marble and stones in the country. Recent discovery of oil and gas in Rajasthan is expected to lead to the development of downstream industries in petroleum and chemicals. Reforms in the electricity sector in the state are one of the most advanced in the country. Rajasthan is the first state in the country to permit “open access” in its electricity supply market. While the industrial sector has grown at 6.9% per annum, the growth rate of services was 7.4% during the same period. Among services, the share of trade and tourism in state's GSDP stands at over 16%. Rajasthan has a network of almost 300 industrial estates developed by RIICO. These are spread across the state, with many of them focused exclusively on high growth industries such as gems and jewellery, apparels, agro-processing and biotechnology. These estates provide good infrastructure support to units locating there, including uninterrupted electricity and water supply, sewerage and common roads.

Table 2: Growth potential for industrial region: North zone
Locations Jamalpur Bartal Kanakpura Palwal Kanpur Ladhowal Mandi Govindgarh Dhandhari Kalan Bawal Dadri District/City/State Gurgaon Uttar Pradesh Jaipur Faridabad Uttar Pradesh Uttar Pradesh Ludhiana Ludhiana Gurgaon Greater Noida Growth Potential High Medium Medium High High High High High Medium Medium

Source: Knight Frank Research

East Zone
West Bengal is the only state which has been selected from the East zone. The state has the third largest economy in India. Its areas of strength include petrochemicals, steel, food processing and leather industry. With around 8% of India's population residing here, the state is one of the largest consumer markets in the country. West Bengal is also one of the few states which have a surplus electricity generation capacity. The state is the largest producer of vegetables and fruits in the country and offers significant opportunities in the food processing industry. Availability of abundant mineral resources and proximity to ports gives it a competitive advantage particularly in sectors such as steel. The West Bengal Industrial Development Co-operation (WBIDC) has developed over 30 industrial estates in various parts of the state. These include estates in and around Kolkata, Haldia, Duragpur and Asansol. These estates focus on IT/ITES, petrochemicals, chemical based industries and steel based industries. A total of 1,300 hectares of industrial land is currently available with WBIDC across the state for the establishment of new industrial units.

Table 3: Growth potential for industrial region: East zone
Locations Jalpaiguri Coochbehar Maldah South 24 Parganas Howrah Nadia Medinipur District/City/State West Bengal West Bengal West Bengal West Bengal West Bengal West Bengal West Bengal Growth Potential High Medium Medium High High Medium High Source: Knight Frank Research

South Zone
The states selected from the South Zone are Karnataka, Tamil Nadu and Andhra Pradesh.

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• Karnataka
Karnataka is one of the most developed states in south India and is the pioneer in driving the industrial growth in the country. Over the years, the state has been promoted as the preferred destination for domestic and foreign investment to catalyse industrial growth. For a long time Karnataka has been consistently pursuing progressive industrial policies to meet the changing needs of the state's economy and industry. During the last century, the state has had the distinction of building a strong and vibrant industrial base, which combines the intrinsic strengths of large industrial public sector undertakings, large and medium privately owned industries and a wide and dispersed small-scale sector. Karnataka has demonstrated its strength over a wide spectrum of sectors in industry and has had outstanding examples of success. In recent times, it has emerged as the knowledge and technology capital of the country making rapid strides in economical growth. IT and related industries, biotechnology and research and development institutions have given Karnataka a pride of place in the global market, thereby leading to considerable foreign direct investment both in Bengaluru and in other parts of the State. Karnataka, being one among the top five Industrialised states in the country, the state policy aims to achieve a consistent economic growth rate of 8-9% over the next decade. Policy makers propose to create employment opportunities through industrial growth in the state and several sectors have been identified as thrust areas. The state offers a range of incentives including tax exemptions for investment in these sectors. These sectors are electronics, telecommunication, informatics, precision tooling and tool room industries, readymade garments including leather garments (excluding leather tanning), units manufacturing pollution control and effluent treatment plants, equipment and appliances and biotechnology. The state government plans to establish a corpus called the 'Technology Upgradation Fund' of Rs.448.14 million to encourage technology upgradation in industries.

Table 4: Growth potential for industrial region: South zone
Location Madhavaram Sriperumbudur Hosur Peenya Hoskote Medchal Malkapur Vishakapatnam Vijaywada Belgaum Mangalore Mysore Madurai Coimbatore Salem District/City/State Tamil Nadu Tamil Nadu Karnataka Karnataka Karnataka Andhra Pradesh Andhra Pradesh Andhra Pradesh Andhra Pradesh Karnataka Karnataka Karnataka Tamil Nadu Tamil Nadu Tamil Nadu Growth Potential High High High Medium High Medium High High High High Medium Medium High Medium Medium Source: Knight Frank Research

• Tamil Nadu
Tamil Nadu is one of the most industrialised states in India as well as the third largest economy in the country. The State Domestic Product stands at Rs.1168.06 billion and the current economic growth rate is 6.1%. The exports have been recorded at Rs.275.28 billion of 9% in the past decade. The state also has a share of 9.1% Market Potential Value in the country, which reflects a high purchasing power and capacity of the market to absorb new products and services. In recent times, there has been a significant increase in the proportion of population in the middle-income group. Tamil Nadu also has a well developed manufacturing sector with high value addition in the factories, and accounts for 16% of the total number of factories in the country. The growth in manufacturing and services sectors has led to the rise in the standard of living of the people in the state and in turn, has benefited from it.

• Andhra Pradesh
As with the other southern states, Andhra Pradesh has also witnessed high growth within the industrial space. The Andhra Pradesh Industrial policy 2005-10 is aimed at promoting industrialisation in the state. Incentives are being offered to attract investments in this sector. Andhra Pradesh with 272 industrial estates has the second highest number of industrial estates in the country.

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Further, it ranks third in worker population and fourth in total number of factories. The state has four growth centres in Bobbili, Jedcherla, Hindupur and Ongole, and two SEZs in Kakkinada and Vishakapatanam, thereby facilitating a good environment for exports and investments. Development of quality infrastructure through private participation has been given the highest priority. In line with this objective, the government has constituted the Infrastructure Authority (IA) for the rapid development of physical and social infrastructure in the state and to attract private sector participation in designing, financing, construction, operations and maintenance of infrastructure projects. The industrial policy promises 100% stamp duty and transfer duty reimbursements. Large industries are set to gain with the setting up of the Industrial Promotional Fund which would cater to specific problems on a case to case basis.

West Zone
The states which have been selected from the west zone are Gujarat and Maharashtra.

• Maharashtra
Maharashtra's economy is the largest among all states in the country. The state recorded a Net State Domestic Product (NSDP) of over Rs.1506.12 billion in 2003-04. It is a leading industrial state accounting for 20% of the country's investment, 17% of Foreign Direct Investment, 20% of its industrial output and 40% of its exports. Besides, Maharashtra is a leading producer of oil and gas, petrochemicals, pharmaceuticals and automobiles in the country. The state's large urban population and growing services sector provide opportunities for investment in tourism, leisure and entertainment industries. Biotechnology is another emerging sector in the region. Mumbai, the state's capital city, is recognised as the principal commercial and financial centre of the country. The state boasts of well developed transportation and industrial infrastructure, which is among the best in the country. The Export Oriented Units (EOUs) enjoy a competitive advantage owing to the presence of the country's largest airport and container terminal in the state. Maharashtra has two principal ports located at Mumbai and Nhava Sheva, besides having 48 smaller ports along its 720 km coastline as well. There are 19 industrial clusters/locations identified by the Government of India for infrastructure improvement under the Industrial Infrastructure Upgradation Scheme (IIUS). IIUS would help the cluster in enhancing its competitiveness by providing quality infrastructure through public-private partnership.

• Gujarat
Gujarat, India's leading industrial state is a manufacturing powerhouse with world class production capabilities in textiles, petrochemicals, pharmaceuticals and agro-based products. Situated on the western tip of India, Gujarat has the longest coastline in the country. The state has 41 ports including India's only chemical handling port located at Dahej at Bharuch district. The state has extensive road, rail and air network. The recently commissioned Liquefied Natural Gas (LNG) terminals in Dahej stand to augment its capabilities in the power sector and benefit the industry. The state also has India's largest hydro project, Sardar Sarovar. Industrial estates have proven to be a popular business model in the region with Jamnagar being the world's largest industrial estate and Kandla being Asia's first and largest Multi-Product SEZ. The chemical industry in Gujarat accounts for half of the annual investment in the state and contributes to about 20% of the chemical output in the country, while its gem and jewellery industry processes 80% of the diamonds in the country. The state also enjoys a significant market presence in the processed food segment. Gujarat has been keen to leverage its natural resource base and entrepreneurial spirit to maintain its leadership position. To attract investments the state has set up single window operations at the district level. It is also actively seeking private participation to improve existing infrastructure facilities. In fact, Gujarat was the first in the country to develop port facilities, estates and roads in conjunction with the private sector.

Table 5: Growth potential for industrial region: West zone
Location Mumbai Pune Nashik Nagpur Vashi Ahmedabad Vadodara Kandla Surat District/City/State Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Gujarat Gujarat Gujarat Gujarat Growth Potential Medium High High High High Medium High Medium High Source: Knight Frank Research

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Industrial supply Table 6: Land banks for industrial use
State Uttar Pradesh Maharashtra Gujarat Tamil Nadu Andhra Pradesh Karnataka Haryana Rajasthan West Bengal Total land area of the State (’000 acres) 59,535 76,108 48,433 32,124 67,971 47,444 10,873 84,569 21,992 Land area under Industrial Estates (’000 acres) 41 137 66 22 33 28 9 56 1.7 Total available land in Industrial Estates (%) 7 4 38 11 NA 26 8 NA 1 Source: Knight Frank Research

Table 7: Prime industrial estates (for each state)
Sr. No Uttar Pradesh 1 2 3 Haryana 1 2 3 Maharashtra 1 2 3 Tamil Nadu 1 2 3 Gujarat 1 2 3 Karnataka 1 2 3 Andhra Pradesh 1 2 3 Rajasthan 1 2 3 West Bengal 1 2 3 Name of Industrial Estate Location Area (acres) Rental Values (Rs./sq.m. per month) 4,605 1,038.38 769 8,500 7,500 1,800 1,200 500 200 296 148 124 600 1,550 1,200 741 296 148 15,000 3,000 3,000 3,100 2,800 2,200 544 445 435 Occupancy

Ghaziabad Kanpur Meerut Panchkula Technology Park Gurgaon Karnal Ranjangaon Sinnar Butibori Perundurai Nilakottai Gangaikondan Ankleshwar Naroda Pandesara Peenya Hoskote Dharwad Sanathnagar Warangal Pedagantyada Tapukara Cyber Park, Jodhpur Bhiwadi Dabgram Kharagpur Kalyani Phase –III

Ghaziabad Kanpur Meerut Panchkula Gurgaon Karnal Ranjangaon Sinnar Butibori Perundurai Nilakottai Gangaikondan Ankleshwar Naroda Pandesara Peenya Hoskote Dharwad Sanathnagar Warangal Pedagantyada Alwar Jodhpur Alwar Jalpaiguri Kharagpur Nadia

3,796 2,965 703 79 780 72.43 2,313 299 3,750 2,600 380 1,995 4,029 907 545 1,485 402 2,185 88 26 214 750 6 2,000 92 227 77

95% 70% 95% 49% 95% 85% 99% 100% 69% 89% 47% 58% 99% 99% 99% 100% 97% 75% NA NA 89% 80% Upcoming NA 91% 83% 81%

Source: Knight Frank Research

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Special Economic Zones (SEZs)
The concept of SEZs was introduced in India in the year 2000 with an idea to attract foreign direct investments and removing regional gaps in economic development. The policy was introduced to increase India's share of the world trade by facilitating trade friendly measures and improved infrastructure. One of the main purposes has also been to promote manufacturing hubs within India so that marginal increase in exports and imports in lesser developed areas of India could boost economic growth of the country. The main objectives of SEZ act are: ! ! ! ! Generation of additional economic activity with creation of employment opportunities Promotion of exports of goods and services Promotion of investments from foreign and domestic sources Development of infrastructure facilities

As per Indian SEZ policy, any public/private/joint sector or state government or its agencies can set up a SEZ under Special Economic Zone Act anywhere in India. Approved units under SEZ scheme can be the only operational units in a SEZ. In India, 100% FDI is allowed for all the manufacturing activities in special economic zones except ! ! ! ! ! Arms and ammunitions, explosives and allied items of defence equipment, defence aircraft and warships Distillation and brewing of alcoholic drinks Automatic substances Narcotic and psychotropic substances and hazardous chemicals Cigarettes/cigars and manufacture tobacco substitutes

SEZ Supply
Since the introduction of the SEZ policy in 2005, more than 500 SEZs have been planned and 366 SEZs have already been formally approved. In terms of area, the formally approved SEZs cover a total area of 490 sq.km. which forms just 0.016% of total land area of the country. By end of August, 2007, a total of 142 SEZs had been notified, entailing an envisaged investment of Rs.467.05 billion and employment opportunity for approximately 40,153 people. 176 SEZ have been approved in principle covering 1,571 sq.km. (0.05% of the total land area). It is estimated that by 2008-09, with an investment of Rs.2,833.19 billion, SEZs will create over 2,100,000 additional jobs and increase the exports by over Rs.100 billion.

Distribution of land for notified SEZs
7% 18% 4% 30%

7% 4% 30%

AP

Gujarat

Haryana

Karnataka

Maharashtra

Tamilnadu

Others

Source: Knight Frank Research

Sector-wise classification of notified SEZs
0.1% 6% 2% 5% 1% 10% 1% 5% 14%

56%
Biotech Electronics Engineering IT/ITES Multiproduct & services Others Pharmaceuticals Textiles Food Processing Footwear

Source: Knight Frank Research

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Table 8: Distribution of SEZs across the various states of India
States Andhra Pradesh Chandigarh Chattisgarh Dadar & Nagar Haveli Delhi Goa Gujarat Haryana Himachal Pradesh Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Nagaland Orissa Pondicherry Punjab Rajasthan Tamil Nadu Uttar Pradesh Uttarakhand West Bengal Total Notified SEZs 54 2 0 0 0 3 18 16 0 1 20 8 3 24 0 4 0 2 4 33 8 1 6 207 Formally Approved SEZs 72 2 1 4 2 7 39 38 0 1 41 12 13 88 2 9 1 7 8 59 23 3 21 453 In-Principally Approved SEZs 3 0 2 0 0 0 9 17 2 0 10 1 5 37 0 4 0 8 9 12 4 0 13 136 Source: www.sezindia.nic.in

Free Trade and Warehousing Zones (FTWZ)
Free trade and warehousing zone is a type of SEZ specific to the trade and warehousing segment. The objective of free trade warehousing zones is to create trade-related infrastructure to facilitate the import and export of goods and services with freedom to carry out trade transactions in the free currency. These zones would be established in areas close to seaports, airports or dry ports so as to offer easy access by rail and road. These zones will fall under special category of SEZs with a focus on trade and warehousing. Given below is a flowchart which describes the procedure for setting up of an FTWZ.

Process flowchart for setting up an FTWZ
Can be set up by public sector undertakings or public limited companies or by joint ventures in technical collaboration with experienced infrastructure developers

Approval required from Board of Approval (BoA) in the Department of Commerce

Developer shall be issued a letter of permission for development, operation and maintenance.

The developer shall be permitted to sale/lease/rent out warehouses/workshops/office-space and other facilities in the FTWZ to traders/exporters

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Some stipulations
! ! ! ! ! ! ! 100% FDI allowed for the development of these zones Minimum area to be developed under FTWZ is 0.5 mn.sq.mts Minimum outlay for the development of such zones is Rs.1 billion Supplier of material into the FTWZ shall be treated as physical exports for the Domestic Terrific Area (DTA) suppliers FTWZs' envisage duty free import of all goods for warehousing As far as bond towards customs duty on import is concerned, the units would be subject to similar provisions as are applicable to units in SEZs Packing or re-packing without processing and labeling as per customer or marketing requirements could be undertaken within the FTWZ

Exemptions
! ! ! ! Income Tax exemption as per 80 IA of the Income Tax Act Exemption from Service Tax Free foreign exchange currency transactions Other benefits as applicable to units in SEZs

Table 9: List of FTWZs in India
Sr. No 1 Location Village Srinagar and Ravirayal, Mahewhwaram Mandal, Ranga Reddy District, Andra Pradesh Dighi Port, Raigad, Maharashtra Mumbai Mannur Village, Sriperembdur Taluka, Kancheepuram Dist, Tamil Nadu Vallur Village, Ponneri Taluka, Tirvallur District, Tamil Nadu Greater Noida, Uttar Pradesh Kandla - Gujarat Kochi Karnataka Village SAI, Taluka Panvel, Maharashtra Amritsar, Punjab Mangalore Name of Developer FAB City SPV (India) Pvt. Ltd Area (Ha) 120.06 Approval Type Formal Approval

2 3 4 5 6 7 8 9 10 11 12

Balaji Infra Projects Ltd (Port based) Chiplun Infra Pvt. Ltd Formerly M/s FTWZ Ltd.) J. Matadee Eco Parks Pvt. Ltd Jafza Chennai Business parks Pvt. Ltd Free Trade Warehousing Zone Pvt. Ltd LMJ Warehousing Pvt. Ltd FACT & Metals & Minerals Trading Corporation (MMTC) Shipco Infrastructure Pvt. Ltd (SPIL) Arshiya Technologies International Ltd M/s DLF Universal Ltd Suzlon Infrastructure Ltd.

100 40 40 136.8 80 40 40 120 68 40 486

Formal Approval Formal Approval Notified Formal Approval In Principle Approval In Principle Approval In Principle Approval In Principle Approval In Principle Approval In Principle Approval In Principle Approval

Source: Knight Frank Research, www.sezindia.nic.in

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Logistics and Warehousing
The logistics and warehousing sector, especially the much sought after 3PL services, have been witnessing sharp growth in last couple of years. Valued at Rs.37.86 billion in 2005, the 3PL market in India is projected to grow at a CAGR of 21.9% from 2005 to 2012, reaching Rs.151.27 billion by the end of 2012. Rapid growth in the Indian manufacturing sector is creating an increasing need for seamless logistics solutions. While the Indian 3PL market is still very much in its infancy compared to those in other countries, it is experiencing healthy growth and attracting new companies eager to capitalise on the plentiful opportunities it offers. Currently, the trend of outsourcing the entire logistics function to a 3PL service provider is visible only in a few sectors in India. In the automotive sector, for instance, end-to-end outsourcing is becoming increasingly popular as companies realise the benefits of focusing on core competencies and delegating the logistics to 3PL service providers. Just-In-Time delivery (JIT) to the assembly line is another emerging concept that is gaining acceptance in this sector. The penetration of 3PL services is particularly high in the automotive sector. Even companies that have traditionally adopted a conservative business outlook have started outsourcing logistics to 3PL service providers. The IT hardware and electronics sectors are also witnessing a rise in this trend, while those for fast moving consumer goods (FMCG) and pharmaceuticals have relatively low penetration rates.

Investment scenario in logistics sector
As the Indian economy continues to grow at near double digit rates, the demand for logistics, as well as the sector itself, is rapidly increasing. India is spending around Rs.4 trillion annually on logistics. The sector which has largely been under-owned and under-rated amongst all other sectors has recently seen a large amount of interest from the Private Equity (PE) funds. The gestation period in the logistics sector is generally very high as compared to other sectors. A large number of companies have been looking for opportunities to pick up stakes in the lesser known local logistics players. From a long term perspective, the sector shall over the years, follow the path of consolidation, in terms of the number of players existing in the market. The investments that have been made in the sector shall start giving returns only after a period of time however, the recent increase in petrol and diesel prices has had an adverse impact on the stock market performance of the logistics companies.

Table 10: Investments in the logistics sector
Fund name IDFC PE Fund II Kotak PE Clearstone Venture Advisors Tata Capital Old Lane Opportunities Funds Blackstone Temasek Holdings Bennett Coleman & Company Limited Realterm FCH Logistics Advisors Pvt. Ltd * Sidbi Venture Capital Reliance Capital Erdene Capital PLC New Vemon IDFC PE 88 500 854 532 400 Amount (Rs. mn) 1100 1000 160 N.A 1070 2420 1000 N.A Target Firm Sical Logistics DRS Logistics Elbee Express Quickjet Cargo Sical Logistics Allcargo movers First flight couriers ltd Airex Logistics Direct Logistics BLR India MJ Logistics Allcargo movers Delhi Assam roadways Source: Knight Frank Research

* The fund will be set up through a 50:50 joint venture between Future Capital and US-based logistics and real estate investment company Realterm Global. The fund will invest between Rs.29.77 billion and Rs.42.53 billion to set up warehouses across India’s seven key cities. * Realterm FCH will build eight to 10 warehouses, which will also have parking for trucks, petrol pumps, some shops and food. Some warehouses could cater to specific requirements of the food, pharmaceuticals or fashion industries

1

Source: KPMG

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Table 11: Supply statistics of 3PL operators in India
Sr No 1 2 3 4 5 6 7 8 Name of the Organisation Existing Gati Indo Arya Reliance Logistics TCI DRS Logistics AFL Dauscher Safexpress Prologistics TOTAL * Only in the eastern region 0.6 3.6 1.0 6.5 1.2 1.0 3.0 3.5 20.4 Total built up area (mn sq ft) Upcoming 5.0 1.0 1.0* 3.5 3.8 N.A 7.0 3.5 23.8 Source: Knight Frank Research No of warehouses 200 36 151 494 N.A. 46 N.A. 35

Regulatory framework governing logistics and warehousing operations in India
The logistics and transportation sector in India has huge potential owing to the liberalisation of the Indian market. It is estimated that Rs.14 trillion would be spent on infrastructure development like road connectivity, improvement of existing ports, creating new ports from 2005-06 to 2011-12, amongst others. The role of warehousing, both as a key physical (asset-based) infrastructure facility and as a systematic process of achieving logistics efficiencies at various levels of supply chain management is increasingly becoming critical to operational effectiveness. With the rapid growth of both the primary commodity and end-user retail markets, the need for a long-term industrial policy and well regulated growth of the warehousing infrastructure has become critical for sustained economic growth. In order to attain the same, the Warehousing (Development & Regulation) Act was enacted in December 2007.

Key benefits and proposed effects of the Warehousing Act, 2007 on the sector
! ! ! ! ! ! ! The Act enables the banks and other financial institutions to step into the commodities and warehousing sector Higher percentage participation from the private sector including development of modern warehousing infrastructure across the country Overall elevation of India's agricultural commodities sector, which has lacked adequate and quality warehousing facilities Higher transparency infusion into the sector leading to lower costs of financing in rural areas, efficient supply chains, better price-risk management and rewards for better quality and grading Facilitation of the large private investment in warehousing, grading and storage businesses Facilitation of the electronic transfer of title Regulation of warehousing business by registering of the warehouses issuing negotiable warehouses receipts

In this segment of the report, the division of the zones and the segregation of states in each zone have been done as in the previous section.

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North Zone
With states like Delhi, Haryana, Uttar Pradesh (UP) and Rajasthan, North India is one of the most sought after regions in the country. These states together received a total FDI of Rs.461.6 billion in between 2000-2007. Delhi-NCR (which includes parts of Haryana, UP and Rajasthan) received a maximum amount of Rs.441.25 billion as FDI during the same period, the primary reason being the high demand of consumer durables in the region. The rate of increase of urban population is around 93% for Delhi-NCR, which ensures continual increase in demand for all kinds of goods. This is supported by the fact that the growth of organised retail segment in Delhi-NCR has been the maximum in India. According to Knight Frank Research, the following sectors are driving the demand for the 3PL and warehousing segment in the north zone:

Percentage Contribution for Logistic Demand
26% 32%

6%

4% 18% Auto Component Pharmaceuticals FMCG Cement 14% Textiles IT Components

Source: Knight Frank Research With large number of infrastructure projects like Delhi-Mumbai Industrial Corridor, Kundli-Manesar-Palwal Expressway, Ganga Expressway, Taj Expressway, redevelopment of airports at Udaipur, Amritsar, Lucknow, etc. having been announced in the entire northern region, the outlook for the logistics sector seems bright. Amongst the notable projects, Adani Logistics is coming up with a mega logistics park (180 acres) at Pataudi Road in Gurgaon. Companies like DRS Logistics, Gateway District Parks and Prologistics have also come up with large-scale warehouses along the same road. The Garhi Harsaru Inland Container Depot (ICD) lies in proximity to this stretch. The ICD at Gari Harsaru was bought by Gateway District Parks in 2005 for an amount of Rs.170 million. This was a strategic move the company made keeping in mind that the area nearby would develop into a logistics and warehousing hub for Delhi-NCR. The additional edge that this particular stretch has is that there is a culmination of the Kundli-Manesar-Palval Expressway and the rail link between Delhi and Rewari. Currently most of logistics players are in the process of acquiring land on the Pataudi Road to build large-scale, high-quality warehousing facilities.

Locations with logistics activity: North zone
SAHARANPUR

Uttar Pradesh
WAREHOUSING HUB MAJOR LINKAGES STATE BOUNDARY DISTRICT BOUNDARY STATE CAPITAL DISTRICT HEADQUARTER GANGA EXPRESSWAY

MUZAFFARNAGAR BIJNOR BAGHPAT
MORADABAD

MEERUT GHAZIABAD

JYOTIBA PHULE NAGAR

PILIBHIT BAREILY
BUDAUN LAKHIMPUR SHAHJAHANPUR BAHRAICH FARRUKHABAD SITAPUR BALRAMPUR SHARAVSTI

BULANDSHAHAR ALIGARH MATHURA HATHRAS ETAH

FIROZABAD HARDOI MAINPURI AURAIYA ETAWAH KANPUR JALAUN RAI BARELI LUCKNOW UNNAO BARABANKI FAIZABAD

MAHARAJGANJ SIDHARTH NAGAR KUSHINAGAR GORAKHPUR BASTI DEORIA KHALIABAD
AMBEDKAR NAGAR

MAUNATH BHANAN
BALLIA GHAZIPUR

AZAMGARH FATEHPUR HAMIPRPUR JHANSI MAHOBA BANDA PRATAPGARH

KAUSHAMBI
ALLAHABAD

VARANASI GYANPUR

CHITRAKUT

CHANDAULI

MIRZAPUR

LALITPUR
SONBHADRA

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Rajasthan
GANGANAGAR HANUMANGARH

CHURU BIKANER JHUNJHUNU

GOLDEN QUADRILATERAL

JAISALMER NAGAUR JODHAPUR

SIKAR

ALWAR BHARATPUR DAUSA

JAIPUR AJMER TONK KARAULI SAWAI MADHOPUR BHILWARA BUNDI JALORE SIROHI

DHAULPUR

BARMER PALI

EAST-WEST CORRIDOR RAJSAMAND KOTA BARAN

CHITTAURGARH
UDAIPUR WAREHOUSING HUB STATE BOUNDARY DISTRICT BOUNDARY STATE CAPITAL DISTRICT HEADQUARTER DUNGARPUR BANSWARA JHALAWAR

Haryana

CHANDIGARH

PANCHKULA

AMBALA YAMUNANAGAR

KURUKSHETRA

SIRSA FATEHABAD

KAITHAL

KARNAL

JIND HISAR

PANIPAT

SONIPAT ROHTAK

KUNDLI

BHIWANI JHAAJJAR

DMIC

MAHENDRAGARH REWARI

GURGAON PATAUDI FARIDABAD

WAREHOUSING HUB STATE BOUNDARY DISTRICT BOUNDARY STATE CAPITAL DISTRICT HEADQUARTER

MEWAT

GOLDEN QUADRILATERAL

TO KOLKATA

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East Zone
The eastern region constitutes about 21% of the total area of India. The prominent states in the region include West Bengal, Orissa, Bihar, Jharkhand and Assam. Between 2000 and 2007, the total FDI that the region received was approximately Rs.36.1 billion. West Bengal received a maximum of Rs.31.79 billion as FDI during the same period. The state has over the last 8-10 years experienced large-scale transformation with a focused approach towards attracting investments. Initiatives like providing single window clearances and facilitating prospective entrepreneurial interest has accelerated the said process. According to Knight Frank Research, the classification of the sectors driving the demand for the 3PL and warehousing segment in the eastern zone is given below:

Percentage Contribution for Logistic Demand
15%
44%

9%

11%

7% Steel Food products Electronic goods

6% Textile/Apparels

8% Auto components Petrochemicals FMCG

Source: Knight Frank Research According to the Government of West Bengal, the growth of the IT sector in West Bengal has been faster than the overall IT sector growth in India. With locations like Rajarhat and Salt Lake developing into IT/ITES hubs, the demand for organised retailing is on the rise which is also expected to lead to better quality of road infrastructure. Locations like Siliguri, Bhubhaneshwar, Ranchi, Burdwan, etc. are expected to come up in the future as important logistics and warehousing hubs for the eastern region. Some of the proposed infrastructure projects include Eastern Link Highway (stretching around 100 kms between NH-31 and NH-117), upgradation of NH-34 to 4-lane status (connecting Kolkata with South and North Bengal), modernisation of the Netaji Subhash Chandra Bose airport, etc. Besides, Dedicated Freight Corridor Corporation of India (DFCCI) has proposed to develop a Dedicated Freight Corridor (DFC) from Ludhiana to Son Nagar (near Patna), with extensions to Duragapur/Bokaro/Tata Nagar. The corridor is expected to be spread across a total length of 1,280 kms. Some of the upcoming projects include an FTWZ by Reliance Logistics around the Kona expressway and the Kolkata-Delhi National Highway (NH-2), Kolkata International Logistics City (KILC, Howrah), and a 200-acre Auto SEZ at Guptamani (Kharagpur). The first phase of the Rs.10 billion KILC is expected to be ready for handover in another 8-10 months and the entire logistics and distribution hub is expected to be completed in five years.

Locations with logistics activity: East zone
DARJEELING JALPAIGURI

West Bengal

TO SILCHAR KOCH BIHAR

TO KANPUR RAIGANJ BALURGHAT ENGLISH BAZAR

BEHRAMPUR TO DELHI BIRBHUM BARDDHAMAN KRISHNANAGAR

DURGAPUR PURULIYA BANKURA

HOOGLY HOWRAH

NORTH 24-PARAGANAS
KOLKATA

SOUTH 24-PARAGANAS
MEDINIPUR
WAREHOUSING HUB MAJOR LINKAGES STATE BOUNDARY DISTRICT BOUNDARY STATE CAPITAL DISTRICT HEADQUARTER

TAMLUK TO CHENNAI

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South Zone
South India, because of its superior connectivity, owing to the presence of state-of-the-art port facilities and an intricate road and rail network, and presence of organised markets in the retail sector, has always been considered to be a preferred region for setting up logistical/warehousing units.

Percentage Contribution for Logistic Demand
10% 11% 35%

9%

15% 20%

Auto Component

Pharmaceuticals

FMCG

Cement

Textiles

IT Components

Source: Knight Frank Research The logistics industry has grown by leaps and bounds in the south. Traditionally, companies in the south used to take care of their own logistical solutions but with economic empowerment there is a need to improve backward and forward linkages with leading companies looking at outsourcing their operational requirements. Auto components, textile and retail industries are considered to be the major drivers for warehousing industry. In fact, the rapid growth of organised retail space has led to a corresponding demand for quality logistics and warehousing solutions, generating a host of 3PL companies. Chennai is gradually emerging as the key warehousing hub in the south because of its strong infrastructural support, good connectivity and presence of ports. The NH-4 which links Chennai to the western cities like Bengaluru and Mumbai has become the source of warehousing operation in the state. The northern locations of the city like Madhavaram and Red Hills which connects to the cities of Hyderabad and Kolkata in the east have also grown in prominence in warehousing space. Other important warehousing locations in the state include Trivotriyur, Minjur, Poonamallee, Sriperumbudur, Irungatakottai, Chrompet, Numbal, Hosur and Madurai. The development of the Ennore port is expected to considerably increase the potential of the state with respect to 3PL. Vishakapatnam in Andhra Pradesh, which also has fairly good connectivity and the presence of a strong port, might prove to be a competitor to Chennai in a couple of years.

Locations with logistics activity: South zone Andhra Pradesh
TO NAGPUR

ADILABAD

VIZIANAGARAM SRIKAKULAM
NIZAMABAD KARIMNAGAR

VISHAKHAPATNAM

MEDAK

WARANGAL

KHAMMAM

EAST GODAVARI

RANGAREDDY

HYDERABAD

WEST GODAVARI

NALGONDA
MAHBUBNAGAR

KRISHNA

VIJAYWADA GUNTUR

KARNATAKA

KURNOOL

PRAKASAM

ANANTAPUR

NELLORE CUDDAPAH

WAREHOUSING HUB MAJOR LINKAGES STATE BOUNDARY DISTRICT BOUNDARY STATE CAPITAL DISTRICT HEADQUARTER

CHITTOOR

TO CHENNAI

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Locations in Andhra Pradesh like Hyderabad are also expected to witness growth in 3PL space particularly in the temperature controlled warehouses due to the demand from the pharmaceutical and organised retail industry. Leading 3PL providers like Gati and Indo Arya have identified Hyderabad as a potential investment destination. Other important locations in the state include Vishakapatnam, Vijaywada, Medchal, Kompally and Kukatpally. Bengaluru is considered to be the most important hub for logistics and warehousing in Karnataka with Peenya and Whitefield being the most sought after locations for 3PL in the state. The other major locations for logistics and warehousing in Karnataka include Mysore Road, Mangalore, Hoskote, Davengere and Belgaum. The emergence of Bengaluru as a biotechnology hub with the presence of leading companies in the sector like Biocon has increased the potential of the city as a feeder for logistics and warehousing, both within the state and outside. The growth of southern Bengaluru especially around the Electronic City has inadvertently led to the development of Hosur in Tamil Nadu, due to its proximity to Bengaluru, being looked at as a prime logistics destination. This aspect is being exploited by Tamil Nadu by offering very competitive land rates as opposed to that in Karnataka causing friction between the two states

Tamil Nadu
TO BANGLORE VELLORE

TO HYDERABAD TIRUVALLUR

Karnataka
CHENNAI

GULBARGA BIJAPUR

WAREHOUSING HUB MAJOR LINKAGES STATE BOUNDARY DISTRICT BOUNDARY STATE CAPITAL DISTRICT HEADQUARTER TIRUVANNAMALAI

KANCHIPURAM

DHARMAPURI

BAGALKOT
BELGAUM
VILUPPURM SALEM

RAICHUR

DHARWAR
CUDDALORE

ERODE NILGIRIS NAMAKKAL PERAMBAUR ARIYALUR TIRUCHCHIRAPPALLI KARUR COIMBATORE THANJAVUR TIRUVARUR DINDIGUL

KOPPAL

GADAG BELLARY

UTTAR KANNAD

HAVERI

PUDUKKOTTA

NAGAPATTINAM

DAVANGERE SHIMOGA CHITRADURGA
TO HYDERABAD

TENI

MADURAI

SIVAGANGAL

UDUPI

CHIKAMAGALUR

TUMKUR

KOLAR

VIRUDUNAGAR RAMANATHAPURAM

MANDYA
TUTICORIN TIRUNELVELI

BENGALURU

KODAGU
WAREHOUSING HUB MAJOR LINKAGES STATE BOUNDARY DISTRICT BOUNDARY STATE CAPITAL DISTRICT HEADQUARTER

MYSORE CHAMRAJNAGAR

KANYAKUMARI

KE RA

LA

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West Zone
The states in the west zone include Maharashtra and Gujarat. The west zone is considered to be one of the most active zones with regard to the logistic/warehousing space. Factors like presence of well developed infrastructure, strong presence of industry, establishment of mature markets, etc. have led to a concurrent demand for organised logistics solutions with respect to forward and backward linkages. This zone also has the presence of established ports like Kandla and JNPT which are providing important sea linkages.

Percentage Contribution for Logistic Demand
13% 32% 14%

8% 13% 20%

Auto Component

Pharmaceuticals

FMCG

Cement

Textiles

IT Components

Source: Knight Frank Research The Golden Triangle of Maharashtra namely Mumbai, Pune and Nashik along with Nagpur is witnessing the maximum interest in the warehousing and logistical space. As with the other zones the growth of the retail sector is the main factor driving the growth of 3PL. Nagpur, due to its central location, has been identified as the major logistic hub in the country. The setting up of the proposed cargo hub at Nagpur is expected to give a fillip to the logistics and warehousing segment. Gati, one of the premier 3PL providers in the country, has identified Nagpur as its central distribution centre from where goods will be moved to different distribution outlets across the country. Presently, the prevalence of the octroi duty in Maharashtra is acting as an entry barrier in the sector; its gradual phasing out would see increased interest to acquire more property from major 3PL providers. Locations within the state besides those already mentioned where warehousing activity is prevalent are Bhiwandi, Vashi, Waluj, Doli, Dharamtar and Kalamboli.

Locations with logistics activity: West zone Maharashtra
NANDURBAR NAGPUR BHANDARA GONDIA

DHULE

JALGAON AKOLA

AMRAVATI

NASHIK AURANGABAD

BULDHANA WASHIM

WARDHA
YAVATMAL CHANDRAPUR

THANE AHMADNAGAR

JALNA

HINGOLI PARBHANI

GADCHIROLI

MUMBAI
PUNE

BEED OSMANABAD

NANDED

RAIGARH

LATUR

ANDHRA PRADESH

SATARA RATNAGIRI SANGLI

SOLAPUR

WAREHOUSING HUB
KOLHAPUR

MAJOR LINKAGES STATE BOUNDARY DISTRICT BOUNDARY STATE CAPITAL DISTRICT HEADQUARTER

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Gujarat with its superior infrastructure and pro-developmental policies ranks high in the list of preferred 3PL destinations. Sarkej, just off Ahmedabad city has some of the most prolific 3PL activity in the state. The development of the Delhi Mumbai Infrastructure Corridor is also expected to increase the investment inflow from logistics providers into the state. The high internal connectivity and proactive governance has made the state a favourable investment destination for the logistics sector. The rental values in the state for warehousing operators are low, ranging between Rs.8-12/sq.ft. per month. The relative absence of the service industry, predominantly IT/ITES, has affected the state's visibility with respect to other industrial states. Major warehousing locations, other than the ones already mentioned, include Baroda, Hazira, Jhagadia, Kandla, Ranoli, Surat, Umbergaon, Unjha and Viramgam.

Gujarat
BANASKANTHA

PATAN MAHESANA KACHCHH

SABARKANTHA

GANDHINAGAR

KANDLA PORT

SURENDERNAGAR

AHMEDABAD

KHEDA

PANCH MAHAL

ANAND

JAMNAGAR

RAJKOT
BHAVNAGAR

VADODARA

PORBANDAR AMRELI

BHARUCH

NARMADA

JUNAGADH

SURAT

WAREHOUSING HUB MAJOR LINKAGES STATE BOUNDARY DISTRICT BOUNDARY STATE CAPITAL DISTRICT HEADQUARTER NAVSARI VALSAD

THE DANGS

The average rental values at prominent warehousing locations across the selected states are as given below. The locations mentioned are those where warehousing activity is prolific.

Table 12: Average rentals for warehousing space
State Location Warehousing Rentals (Rs./sq.ft. per month) 30 - 65 10 - 20 10 - 14 15 - 20 15 - 20 19 - 28 12 - 18 15 - 20 10 - 15 Source: Knight Frank Research

New Delhi Haryana Uttar Pradesh West Bengal Karnataka Tamil Nadu Andhra Pradesh Maharashtra Gujarat

Okhla Bhiwadi, Manesar, Sonepat Ghaziabad, Noida Kolkata Peenya Red Hills Medchal Panvel, Bhiwandi Sarkej

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Brief on major infrastructural projects affecting logistics in India
Infrastructure forms a key parameter for development and operations of the industrial sector as well as for the logistics and warehousing. Therefore, we have mentioned a few important infrastructural projects in the country, which will not just help in improving the connectivity across the length and breadth of the country but will also act as a catalyst of increased logistics activities around them.

1. Delhi Mumbai Industrial Corridor (DMIC)
Background: ! ! ! ! 1,483 km long western Dedicated Freight Corridor (DFC) project between Delhi & Mumbai to be commissioned by 2012 An MOU was signed between MoCI and METI, Japan in December, 2006 to create a framework for mutual cooperation for the project GOI initiated the DMIC to leverage the economic benefits arising from the western dedicated freight corridor GOI accorded 'in principle' approval to the DMIC Project Outline in August, 2007

DMIC route map

Short listed industrial areas
! ! ! ! ! ! Meerut-Muzaffarnagar (Uttar Pradesh) Faridabad-Palwal (Haryana) Jaipur-Dausa (Rajasthan) Vadodara-Ankleshwar (Gujarat) Dighi Port (Maharashtra) Nimach-Nayagaon (Madhya Pradesh)

Industrial infrastructure
! ! ! ! ! New industrial clusters/ parks/ SEZs Upgradation of existing industrial estates/clusters Modern integrated agro-processing zones with allied infrastructure IT/ITES hubs and other allied infrastructure Efficient logistics chain with integrated multi-modal logistic hubs

Developing logistics facilities
Each common Investment Region/Industrial Area (IR/IA) will be provided with modern logistics infrastructure to serve containerised and non-containerised cargo. The Integrated Multimodal Logistics Hubs will be situated at: ! ! ! ! ! ! ! ! ! ! Bawal and Palwal, Haryana Ajmer/Marwar, Rajasthan Palanpur in Gujarat Nashik, Pune in Maharashtra Dewas and Indore in Madhya Pradesh Envisaged port (Container, Ro-Ro, Bulk) terminals Bulk terminal, Ro-Ro facility at Dahej Break-Bulk terminal, Ro-Ro Facility at Maroli Container terminals at Hazira, Dighi ports State-of-the-Art Warehousing zones to be provided with inventory management and communication system integrating logistics components as well as facilitating 3PL operators

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2. Eastern Freight Corridor
Along with the Western Freight Corridor or DMIC, on which the work has already started, the Government of India is also proposing an Eastern Freight Corridor on the same lines. This will run from Ludhiana in Punjab to Son Nagar in Bihar, with feeder routes extending upto Amritsar in north and Durgapur/Tatanagar in eastern India. ! ! ! ! ! Route: Son Nagar-Mughalsarai-Allahabad-Khurja-Ludhiana Route Length: 1,280 km No. of Lines: Double (Single between Khurja and Ludhiana) Maximum Speed: 100 kmph Feeder Routes: 2,841 km
RAJASTHAN
KANPUR

LUDHIANA

DADRI

Project Hightlights
! ! ! Fit for double stack container operation Capable of 30-32.5 tonnes axle load Upgradation of 4,500 km feeder routes for Eastern and Western corridors fit for 25 tonne axle load

MUGHAL SARAI

DURGAPUR

MADHYA PRADESH

3. Golden Quadrilateral
The Golden Quadrilateral (GQ) is the largest express highway project in India. It is the first phase of the National Highways Development Project (NHDP), and consists of building 5,846 kms of four/six lane express highways connecting Delhi, Mumbai, Kolkata and Chennai, at a cost of Rs.580 billion. According to National Highways Authority of India statistics, as of September 2007, 96% of the entire work has been completed.

Economic benefits
The GQ highway project will interconnect many major cities and ports. It will give an impetus to truck transport throughout India as well as aid in the industrial growth of all small towns through which it passes. It will also provide vast opportunities for transport of agricultural produce from the hinterland to major cities and ports for export. In addition, it will provide job opportunities in its construction as well as demand for cement, steel and other construction materials.

4. North South and East West Corridor (NSEW)
The North South-East West Corridor is the largest ongoing expressway project in India. It is the second phase of the National Highways Development Project (NHDP), and consists of building 7,300 km of four/six lane expressways connecting Srinagar, Kanyakumari, Porbandar and Silchar. As of September 2007, 20.37% of the entire work has been completed, with the final completion date set as February 28, 2009.

Map depicting Golden Quadrilateral and NSEW Corridor

GOLDEN QUADRILATERAL NORTH-SOUTH CORRIDOR EAST-WEST CORRIDOR

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Key demand drivers for the logistics and warehousing sector Higher economic growth
! ! Increased Export-Import trade has grown at 20.17% CAGR in the last five years Ministry of commerce has targeted to increase India's share in global trade to 1.6% from existing 0.8% in the next five years

Improving infrastructure in the country
! ! ! ! NHAI has signed three BOT projects concession agreements at a cost of Rs.8.79 billion As per the 11th five year plan, infrastructure spending as a percentage of GDP is expected to increase from the existing 4.7% to 8% in the next five years Developments of projects like Golden Quadrilateral, North-South and East-West highway Road transportation account for 65% of the freight traffic in India

Expected increase in port capacity
! ! The existing sea port capacity of 737 million tonnes per year is expected to double by 2012 Sea and airport development projects have been thrown open for private development by the government with intentions of carrying out larger PPP projects

Development of the railways network
! ! ! Formation of SPV for execution of various projects Provision for creating strategic rail links to ports, improve hinterland connectivity and development of multi-modal transport corridors The Dedicated Freight Corridors (DFCs) are expected to have a total rail length of 2700 kms (Eastern and Western DFCs, together )

Simplified tax regime
! ! ! Phasing out of the Central Sales Tax (CST) in the next three years (by 2010-11) Increased scope for value-added services in the warehousing and logistics sector Paving way for value-added taxation (VAT) becoming a central level tax leading to smoother logistics and distribution

Increased consumption
! ! ! ! India's consumption rose 21.38% to Rs.468.93 billion. Fueled by a rising young, highly-educated, middle-class population, India's economic boom is not expected to slow in the near future With India's personal consumption rates at a staggering 67% of GDP second only to the United States this middle-class spending on luxury goods is creating a robust market The new mass merchant-style organised retailing, which today makes up about 5% of the overall market, is expected to grow to Rs.2557.79 billion and increase the overall retail market by a CAGR of 21.8% by 2015 The Index of Production of Consumer growth has grown by 62% in the past six years (2001-2007)

Organised Retailing Forecasted Sector Growth
Stationery Footwear Jewellery Home Improvement Food Services Durables & Mobiles Clothes & Fashion Food & Grocery

0%

10%

20%
2004

30%
2015

40%

50%

Source: Logistics Management

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Table 13: State wise attractiveness table for logistics/warehousing
Statewise attractiveness parameters Infrastructure Sub parameters HR DL RJ UP WB GJ MH AP TN KN

Road Connectivity Power Rail Connectivity Airport Connectivity Sea Port Connectivity

M L M L L M L H

H H H H L H H H H

H L M L L M M M M

M L H M L L L M M

M H H M H H H H H

H H M M H H H L M

H H H H H M M H H

M M M H H H M M M

H M H H H M M H M

H M H H M L L M M

Government Policy

Legislative impact and Reforms Govt proactiveness for the sector

Land cost Proximity to established market Distance (km) from the closest city/estab. market

H

Key: HR - Haryana DL - Delhi RJ - Rajasthan TN - Tamil Nadu KN - Karnataka H - High M - Medium L - Low

UP - Uttar Pradesh

WB - West Bengal

GJ - Gujarat

MH - Maharashtra

AP - Andhra Pradesh

Source: Knight Frank Research According to Knight Frank Research, the states of Delhi, West Bengal and Maharashtra emerge as the most favourable destinations for growth of the logistics and warehousing sector in India. The emergence of these states is a reflection on the presence of relatively organised markets as seen in the cities of New Delhi, Kolkata and Mumbai. These states ranks high on its potential for reforms and proactive structure which shows that there is still ample scope for growth for the logistics and warehousing sector within these markets, the presence of excellent port (sea/air) connectivity is also expected to hasten this growth. The key factor which is expected to contribute to this growth is the steps the respective state government takes in improving the quality of infrastructure and maintaining an investor friendly environment in their respective states. The rising inflation rates which is taking a toll on the price of commodities and the market correction which is currently being witnessed by the country in all sectors are some of the serious challenges which have to be overcome before further growth can be realised.

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Case Study: Transport Corporation of India (TCI) Company Background
TCI Group with its 49 years of experience and a turnover of over Rs.12 billion is India's integrated supply chain and logistics solutions provider with a complete range of services. With its customer-centric approach, world class resources, State-of-Art technology and professional management, the group follows strong corporate governance and is committed to value creation for its stakeholders and social responsibilities.

Fact file
! ! ! ! TCI has 15% market share of the organised logistics industry Extensive network of over 1,100 company-owned offices Over 5,700 employees Operates in six business segments Transportation Express (Courier) Supply chain solutions (SCS) Coastal shipping Windmills Trading (fuel stations) ! ! ! ! ! ! ! Owns a fleet of over 3,000 trucks and 5 cargo ships Operates approximately 7000 trucks on a daily basis It owns about 15% of it while the rest are leased 6.5 mn.sq.ft. of state-of-the-art warehousing space Total installed windmill power generation capacity of 11.5 MW The group moves goods valued at more than 1.5% of India's GDP XPS, the courier services arm of TCI is amongst the top three express distributors in India

The company forayed into 3PL solutions by forming a 49:51 Joint Venture (JV) with Mitsui & Co in 1999. The JV provides complete logistics solutions, to Toyota Kirloskar Motors India. TCI is the first road transport organisation in the country to achieve ISO 9001:2000 certification in service quality for its operations.

TCI's business segments
Supply Chain Management Logistics Road/Rail/Sea/Air

Warehousing

Courier & Cargo

Cold Chains

Cross Decks

FTL & LTL

Clearing & Forwarding
FTL Full Truck Load LTL- Less than truck load DC Distribution Centre ODC Over dimensional cargo/Hazardous Source: ICICI Direct Research

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Business Model Transformation (2007-09)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

FY07
Transport Express

FY08e
Supply Chain

FY09e
TCI Seaways division Power division

Source: ICICI Direct Research The share of the Supply Chain Solutions (SCS) segment is expected to increase from 13% in FY07 to 19% in FY09. The company being transformed from a transport company to an integrated logistics service provider, the share of the transport segment is expected to be brought down to 50% in FY09 from 52% in FY07. This segment still remains the maximum contributor to the revenue generation of the company. The express cargo segment is expected to form approximately 25% of the company portfolio over the next two years.

Percentage contribution to EBITDA
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
26% 24% 21% 28% 27% 26% 20% 23% 26% 8% 17% 8% 19% 7% 20%

FY07
Transport Express

FY08e
Supply Chain TCI Seaways division

FY09e
Power division

Source: ICICI Direct Research Revamping of the revenue mix will consequently result to a change in contribution to Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) from each segment. The SCS and XPS divisions with high EBITDA margins will contribute over 55% to EBITDA, while the transportation business will see its contribution decline to 21% from the existing 26% levels. Out of the various business segments of TCI, transport division has been the key contributor to the revenue. However, the company has realised that the EBITDA margins are not very high in this segment. Verticals like supply chain and express courier services has comparable EBITDA margins and thus the company has been in the process of increasing their share in the overall business model. The target for contribution from the transport division is expected to further reduce and stabilize at 40%. The EBITDA contribution from this business is expected to decline to 21% in 2009 from today's 26%.

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The contribution of SCS and XPS to EBITDA is expected to increase from 48% in 2007 to 52% in 2009. Since the company has identified a huge supply demand gap in the number of players providing value added end-to-end logistics services, it plans to go ahead with its plans to increase the share of SCS and XPS in its business portfolio.

Annual growth in operating profits
140 120 100 10% 9% 8% 6% 5% 4% 3% 2% 1% 0%
Percentage (%)

7%

Rs Crores

80 60 40 20 0

FY06

FY07
EBITDA margins

FY08e

FY09e

Operating profit margins
Source: ICICI Direct Research

The demand for logistics is the maximum from the auto sector for the company. This is followed by Fast moving consumer goods (FMCG), Telecom, Pharma and chemicals.

Table 14: List of key clients
Auto Toyota Bajaj Maruti Tata Mahindra & Mahindra Sonalika TVS JCB Source: ICICI Direct Research FMCG HLL P&G Nestle Cadbury Amul Office One CCD Telecom Nokia Reliance Motorola Ericson Tata Tele Pharma Dr Reddys Sunil Health Bharti Health Chemicals MCC PTA Indo Rama PRAXAIR

TCI Supply Chain Solutions: the real estate aspect
TCI has around 220 properties across the country, which is currently being used as branch offices or warehouses. With most cities expanding due to increasing urbanisation, some of these properties, which were earlier situated on the outskirts of cities, are now within city limits. The company invested approximately Rs.220 million in land banks in FY07. However, the amount of capital expenditure proposed for FY08 is expected to be around Rs.1.10 billion. A total of Rs.1.30 billion is expected to be invested into warehousing land till the year 2010. The company has decided to move its logistics activities out of the cities and commercially develop the existing land. Initially the company plans to develop four properties with a total area of 12.54 acres over FY08-12. These properties are located in Delhi, Bengaluru, Dehradun and Ahmedabad. The company plans to come up with residential developments in Bengaluru and Ahmedabad. While, the properties in Delhi and Dehradun have commercial development proposed.

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Outlook
Industrial
The current growth of the industrial sector can be primarily attributed to the economic growth in the sector. Though there has been a temporary dip in the industrial growth, the growth momentum is expected to be sustained in the long run. The recovery time of the industrial sector in the current scenario is expected to be of strategic importance. From the analysis of the past years' data, it can be inferred that Indian industry have followed a uniform cyclic pattern, lasting for three years. The Indian industrial GDP data (at constant prices) from 1970-71 to 2002-03 shows that upswings for the last three years is on the downslide and strategically, it implies that the Indian industry has to take into account this cyclic behavior in sales planning, sales forecasts, pricing and capacity expansion. The factors which are known to hinder industrial growth are: ! ! ! ! ! ! ! ! Reservation for small scale sector High customs tariffs Rigidities in labour law acting as impediments to building large firms and reaping the economies of scale and scope Frictions faced in the creation and closure of firms in response to normal competitive market dynamics Lack of clarity in the structure of indirect taxes affecting resource allocation Surge in global oil price Increasing inflation Cheaper goods from China

The developed countries have been able to resolve the issue of cyclic behaviour through strong fiscal management and a growing preference towards the services sector. The upswing in the Indian industrial scenario can also be sustained by emphasis on fiscal management by the State and aggressive pursue of reforms related to trade, labour and overall economy.

SEZ
Special economic zones are avenues for growth which promote urbanisation and privatisation in the country. This growth needs to trickle down to the local economies in order to attain higher growth rate while removing regional gaps. Government of India is evaluating the concept of Investment Regions, modelled on Pudong, Rotterdam and other successful ventures across the world. To get the maximum possible benefit from the proposed investment in infrastructure, the Government of India has proposed to come up with a plan for setting up 5 or 6 such regions in India. The proposal, currently under debate, plans for a single mega industry-led cluster that will have a planned network of high quality roads, air and sea ports and power plants connecting every industry and development area in a geographical area of 250-300 sq.km. It has also been proposed to include the existing SEZs in such Investment Regions. In order to attain balance in revenues from growth of SEZs and land pool, holistic approach for development of SEZs is required, where case to case handling of SEZ should be based on nature, potential and location of SEZ in the macro zone. Another factor which should be taken into account is the procedure related to land acquisition, as the development of SEZs is giving rise to controversies, particularly among landless agricultural labourers who fear loss of livelihood and expect little by way of compensation. This has slowed, if not discouraged, the private sector developing the SEZs and has also affected FDI flows into the SEZs. The challenge, therefore, is to simultaneously boost agricultural productivity, while creating enough manufacturing and other alternate employment opportunities for the non-agricultural sector. The basic difference between the Chinese and the Indian model of SEZs lies in their structure. In China, SEZs are predominantly manufacturing industries-based, whereas in India we have service sector based SEZs as well. Currently, in China, over 20% of the FDI flows into SEZ which generate 10% of exports. The basic factor for success of SEZ in China is their investor-friendly policies. The Chinese Model includes: unique location, large size, attractive incentive packages, liberal customs procedures, flexible labour laws, strong domestic market, and allows local governments to administer the SEZs. The establishment of the SEZs has undoubtedly helped to increase the volume of international trade and will continue to do so. Further, a large amount of foreign investment has found its way not only into the export trade, but also into infrastructure construction and commerce. Foreign companies have been encouraged to establish their presence in the territories and the export industry has grown. Advanced foreign technology has been brought in with the inflow of foreign investment.

Logistics and Warehousing
In 2005, the Indian logistics market was worth an estimated Rs.660.3 billion. The transportation logistics function contributed towards the largest share of the market followed by warehousing. The logistics market in India is fragmented predominantly due to the large presence of the unorganised service providers. Logistics, which should be considered to be one of the lifelines of a country the size of India, has so far been treated as a secondary activity. The industry broadly consists of freight consolidators, transporters, warehousing specialists, and organised 3PL solutions providers; in the increasing order of value addition to the service. Warehousing in India has been considered as a storage function, and as with the logistics function, most companies treat it as a secondary activity, neglecting the complexity of the operations involved and the cost benefits that can be derived. This segment also forms a significantly large portion of the entire market, as multiple warehousing is a very important cost saving requirement in the Indian scenario.

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Currently, warehouse management in India follows more of a Clearing and Forwarding (C&F) agent model. Most of the warehouses are in the form of depots or stocking points managed by agents for companies on a contractual basis and are not managed very professionally. Most of these C&F depots are used by companies to facilitate transfer of goods between stock points. Concepts such as automation, vertical space utilisation, and the use of warehouse management systems were quite unheard of. However, these are slowly but steadily gaining prominence. The 3PL service providers assume end-to-end responsibility to manage a part or the company's entire supply chain. The growth of 3PL service providers in India has introduced the use of global supply chain management standards in the country. However, the 3PL service providers form a miniscule part of the entire market, comprising around 3% of the Indian logistics. Roads carry the bulk of the freight in India. The roads in India have a history of being unsafe and in very bad conditions. This is changing with the construction of the Golden Quadrilateral and North-South-East-West (NSEW) highway networks, traversing the entire country. The highway infrastructure is highly strained, as it comprises only around 1.4% of the total road network in India but carries in excess of 50% of the country's total freight. Even though rail freight is more cost effective in terms of cost per unit distance and per unit weight, the efficiency of the rail freight system in India has for long been low and it has also been considered as a secondary freight mode. Previously, rail was the most preferred mode of freight; however, bad pricing and inflexibility have resulted in the railways experiencing a downturn. With the Indian government announcing plans to open up the containerised rail freight sector to private operators this is expected to change. Companies such as APL Logistics, Maersk Logistics, Gateway District Parks, Central Warehousing Corporation, JM Baxi group, Adani Logistics, and Reliance Logistics are expected to enter into this segment. The barriers to enter this segment are rather low. Companies need to have a minimum turnover of around Rs.1 billion in India. To get a permit license for 20 years they need to pay the government between Rs.42.6 million and Rs.426 million, depending on whether they want to operate on a specific route or an all India basis. Rail freight comprises around 670 million tones, which is around 33% of the total domestic traffic in India. Companies in the metals, heavy machinery, and engineering and cement sectors are expected to benefit from the opening up of the railways to private participants as these carry bulky cargo over long distances. Previously, costs of trucking were very high as the final destination could be in a remote corner of the country, where a back-haul arrangement would be nearly impossible. In sectors such as these, the cost of entire logistics spending was as high as 75%. Long distance transportation by rail can help cut costs in these sectors. With the railways department mulling a separate freight corridor, this sector is likely to experience a positive trend. This is keeping in mind that passenger trains get higher priority over goods trains and the new corridor can run parallel to existing lines to places of heavy activity such as ports.

Table 15: SWOC of logistics and warehousing sector in India
Strengths Increasing per capita income High GDP growth Land availability Rising Industrial Production Availability of manpower Large coastline Good port connectivity Weaknesses High logistics cost as a % of GDP (13 -4%) Lack of use of technology in the sector Lack of effective warehousing management systems High risk involved in fleet movement Low quality of existing infrastructure Lack of skilled labour Absence of established regulatory framework for the sector Lower profit margins in comparison with other development options Opportunities Market at nascent stage Increase in container traffic movement at Indian ports Provision for increased PPP in the sector Phasing out of the Central Sales Tax (CST) Setting up of Free Trade Warehousing Zones (FTWZs) Dedicated Freight Corridors (DFCs) Increased retail demand Lack of temperature controlled warehouses (cold storages) Increased trade activity Growth potential of express transport Inclination towards outsourcing services to specialists Proposed Air Cargo Complexes across the country Challenges Expected lower acceptance for organised logistics services Delay in implementation of ports' capacity expansion projects Geographical size and diversity of the country Security concerns

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The large unorganised segment of the logistics industry in India poses a tough competition to the companies in the organised one. The unorganised segment service providers have lesser overhead costs and are hence in a position to provide extremely competitive rates. This is expected to have a considerably large impact in the future, posing a challenge especially to the 3PL service providers. Besides, since entry barriers are also low, there is the possibility of intensified competition even in the organised sector. Complex tax laws and infrastructure bottlenecks are also issues to be dealt with. The growth of the Indian economy, especially the rise in the manufacturing sector is one of the key growth drivers of the logistics industry in India. Apart from this, initiatives by the Government to remove bottlenecks in the logistics infrastructure are also drivers for growth in the sector that is expected to grow at a CAGR of 6.5% from 2005 to 2012.

Comparative analysis of developing economies
The comparative analysis has been carried out in order to understand the growth potential of the logistics and warehousing segment in various developing economies. The countries have been rated on two basic parameters of logistics and warehousing potential and economic growth potential. The analysis is of a qualitative nature and the countries considered are Brazil, Russia, India, China, Thailand, Singapore, Malaysia and Indonesia on a High-Low format.

High Logistics & Warehousing potential
China

India

Malaysia

Brazil

Russia

Singapore Thailand Indonesia

Low Economic Growth Potential
Source: CIA World Factbook, United Nations Industrial Development Organization, IMD International

High

Logistics and Warehousing potential
! ! ! ! Overall connectivity: The points for this parameter have been allotted by considering the spread of airports, waterways and highways in each country Apparent consumption: It is defined as the output plus imports less exports. It is thus the right measure to gauge the internal consumption or the demand existing in the country. Infrastructure initiatives: The points have been awarded on the basis of the infrastructure index Industrial production growth rate (IGPR): This entry gives the annual percentage increase in industrial production (includes manufacturing, mining, and construction)

Economic growth potential
! ! ! ! Economy: The points for this sub-parameter have been awarded on the basis of Gross domestic product (GDP) of each country Volume of international trade: Import and export volumes for each country Political risk index: The points have been awarded on the basis of the Global political risk index (GPRI) which takes into account factors like government, society, security and the economy Consumer price inflation (CPI): The points for this parameter have been awarded on the basis of the percentage change in the index (negative scale)

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Parameters affecting logistics in India
Volumes of international trade

India
Economy
Connectivity Apparent consumption Index of Industrial Production India lags behind in terms of turn-around times at its ports. This being the major factor for lower EXIM trade in spite of very high demand.

Consumer Price Inflation (% change)

Turn around times and efficiency at Indian ports

Infrastructure initiatives Source: Knight Frank Research According to Knight Frank Research, the developing economies can be ranked as below in terms of Logistics and Warehousing potential vis-à-vis the economic growth:

Table 16: Ranking based on logistics potential
Country China India Russia Brazil Malaysia Singapore Thailand Indonesia Rank 1 2 4 3 6 5 7 8 Source: Knight Frank Research

India and China get the maximum ranking for apparent consumption indicating increasing expenditure patterns. These two countries also have large population base and thus the demand is expected to sustain for these two developing economies. At present China has better infrastructure in terms of the port capacity and turn-around times. The concept of SEZs is also much more common in China. With the number of SEZs proposed to come up in India, the supporting infrastructure for the sector is expected to improve siginificantly leading to reduction in turn-around time. This is expected to further lead to reduction in logistics cost as a percentage of the GDP.

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Table 17: Comparison of India with other developing economies
Parameter Economy Volumes of International Trade Political Risk Index Consumer Price Inflation (% change) Connectivity Apparent Consumption Infrastructure Initiatives Industrial production growth rate Highest Ranked Country China China China Singapore India China Singapore China Ranking for India 3 4 2 4 1 2 4 3

Source: CIA World Factbook, Eurasia Group (political & economic risk analysis firm), United Nations Department of Economic and Social Affairs

! ! ! ! !

India gets ranked the highest in terms of extent of connectivity within the country. This factor is expected to boost the scope for further strengthening of the infrastructure requirements of the logistics sector Volumes of international trade are very low in the country vis-à-vis the other developing economies. The long turn-around times at our ports are also impeding the growth in international trade. With increasing demand for goods in the country, India is expected to perform better on this parameter. India ranked low for infrastructure initiatives, there are concerns regarding the commissioning of various infrastructure projects under construction in the country. With increased economic activity, India has also seen huge increase in consumer price inflation over the years. This is a major deterrent to the rise in demand in the country. The country is ranked high on apparent consumption.

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Glossary
! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! 3PL: Third Party Logistics GDP: Gross Domestic Product PPP: Public Private Partnership FDI: Foreign Direct Investment CAGR: Compound Annual Growth Rate TEU: Twenty feet Equivalent Units GSDP: Gross State Domestic Product NSDP: Net State Domestic Product RIICO: Rajasthan State Industrial Development & Investment Corporation Ltd. ICD: Inland Container Depot KMP: Kundli Manesar Palwal Expressway PPP: Public Private Partnership SPV: Special Purpose Vehicle CST: Central Sales Tax VAT: Value Added Tax DFC: Dedicated Freight Corridor C&F: Clearing & Forwarding INR: Indian National Rupee IIP: Index of Industrial Production IGPR: Industrial production growth rate CPI: Consumer Price Inflation TCI: Transport Corporation of India SCS: Supply Chain Solutions FTL: Full Truck Load LTL: Less than truck load DC : Distribution Centre ODC: Over dimensional cargo/Hazardous EBIDTA: Earnings Before Interest, Taxes, Depreciation and Amortisation. XPS: Xpress Parcel Service EXIM: Export Import LOA: Letter Of Approval

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Industry Report 2008

39

Bibliography
Brochures/information booklets
! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Rajasthan State Industrial Development and Investment Corporation Limited Haryana State Industrial and Infrastructural Development Corporation Limited Uttar Pradesh State Industrial Development Corporation Limited West Bengal Industrial Infrastructure Development Corporation Gujarat Industrial Development Corporation Maharashtra State Industrial Development Corporation Limited Andhra Pradesh Industrial Infrastructure Corporation limited Tamil Nadu Industrial Development Corporation Karnataka Industrial Areas Development Board Government of West Bengal, Annual Report, year 2006-2007 Skill gaps in the Indian Logistics Sector: A white paper (KPMG & CII) The Logistics Sector in India: Overview and Challenges by Pankaj Chandra and Nimit Jain Supply Chain Infrastructure Initiatives- Railways a presentation by N. Madhusudan Rao. DMIC Status & Opportunities, a Presentation by Delhi-Mumbai Industrial Corridor Development Corporation Limited. World Bank Department of Industrial Policy & Promotion, Govt. of India Ministry of Statistics and Programme Implementation, Govt of India (IIP) CIA World Factbook United Nations Industrial Development Organisation

Websites
! ! ! ! www.sezindia.nic.in www.ibef.org www.tcil.com www.ftwz.com

40

Annexure
State comparison chart
Literacy Rate Human Development Index NSDP (US$ billion) NSDP growth (10 years) Per Capital Income (US$) 592 2,666 4,468 1,548 None Chandigarh NA Agro-based, Electronics, Handloom, Hosiery, Textiles, Export Oriented Units, Petrochemicals, Property Development and Retailing NA IT - ITES, Electricity generation and distribution NA Healthcare Exports (US$) million National Highway length (km) Rail Length (km) International Airport Domestic Airport Seaport Potential

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21 67.90% 0.509 7.1 6.50% 56 61% 0.424 11.5 6% 327 965 5,585 5,894 Jaipur Jodhpur, Udaipur, Jaisalmer Palam 13.8 81.67% 0.737 17.8 15.38% 1,099 3,514 72 N.A. Indira Gandhi (65 Kms: International Delhi Metro) Airport 5,440 Lucknow, Varanasi 166.2 56.27% 0.388 36.3 NA 210.53 531.9 5,599 Agra, Kanpur, Allahabad Kolkata Bagdogra NA Biotech, IT- ITES 80.2 68.60% 0.472 21.5 8% 395 2,800 2,325 3,681 Kolkata, Haldia Ahmedabad Surat, Vadodra, Jamnagar 5,450 Mumbai, Nagpur Pune, Aurangabad, Nashik, Kolhapur 4,472 4,752 Hyderabad Visakhapatnam, Tirupati, Rajahmundry, Warangal, Vijayawada, Donakonda, Kadapa Puttaparthy NA NA NA 4,183 NA Chennai Madurai, Tuticorin, Tiruchirapalli, Coimbatore 52.8 67.04% 0.478 47.32 9.20% NA NA 3,843 3,000 Bengaluru Mangalore, Hassan, Mysore, Gulbarga Mumbai Leisure & entertainment, Biotechnology IT-ITES, Tourism

Sr No

State

Capital

Area (sq km)

Population on (Census) 2001, million

1.

Haryana

Chandigarh

44,000

2

Rajasthan

Jaipur

342,239

3

Delhi

New Delhi

1,483

4

Uttar Pradesh

Lucknow

240,928

5

West Bengal

Kolkata

89,000

Industry Report 2008

6

Gujarat

Ahmedabad

196,000

50.6

69%

0.479

22

12.40%

833

1,400

2,871

5,186

7

Maharashtra

Mumbai

308,000

96.9

77%

0.523

35.3

4.70%

621

14,875

4,176

8

Andhra Pradesh

Hyderabad

275,068

76.2

60.47%

0.416

49.3

9%

519

93.65

Visakha patnam

Electronic Hardware, Semiconductor, Gems & Jewellery Industry, Mines and Minerals

9

Tamil Nadu

Chennai

130,000

62.1

73.50%

0.531

NA

Chennai, Ennore and Tuticorin

10

Karnataka

Bengaluru

19,200,000

New Mangalore Port, Karwar Port

Engineering, Electronics, Automobile & Auto Components Industry, Textile & Apparel Industry, Agro & Food Processing

Knight Frank

Source: IBEF - India Brand Equity Foundation

Knight Frank

Industry Report 2008

Industry Report 2008

Knight Frank

Research

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