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How do you assess leverage capacity for a

The leverage is the amount of debt in a company.
When you decide to assess the leverage capacity of a company, you want to know the
maximum leverage of the company.
When you want to assess a maximum leverage you need to make sure that the company
can repay 1) interest expense and 2) the principal.
To do so, it is important to look at cash flow before debt service, its evolution and
sensitivity to different parameters (sales growth, costs evolution etc). This cash flow
will have to be sufficient to 1) pay interest, 2) pay principal and 3) gives some headroom
to allow the company to grow or face bad situations.
You can back-calculate the maximum leverage by taking the amount you can afford to
give up to the debt holder.
To assess maximum leverage, you need to also look at the market: are companies in this
sector very levered? Are banks landing money to this type of companies?
To assess leverage for a target, the financial sponsor need to be sure that the company
can repay the debt quickly and gives space for equity value creation! If you have too
much debt, equity value might get to 0 if things go badly!

What are the advantages of using Mezzanine

debt from the companys point of view?

Increased leverage

Might offer lower cost of capital (since cheaper than equity) with less equity

Interest paid on Mezzanine debt is tax deductible where dividends are not

Senior creditors benefit from the cushion of the junior debt

Debt under mezzanine arrangements is often payable after certain years (PIK
interest), delaying obligation to buyer

If a company trading at 8x P/E buys a company at

4x P/E in an all stock deal, is the transaction most
likely accretive or dilutive?
Accretive. Generally when a company with a higher multiple acquires a company with a
lower multiple, the transaction is accretive. This is true because the acquirer is paying
less for every pound of earnings than the market is currently valuing.

You have a 10% note with a maturity in five years

trading at 80. What is the current yield?
Here, Par value is 100 so you lost 20 cents on the dollar (100-80).
That twenty cents is divided by five since you still have five years left on the investment
So the current yield on the note is 14% (10+4=14).

What are the characteristics of a good LBO

You will find below some characteristics of a good LBO candidate:

Strong competitive advantages and market position

High barriers to entry

Steady and predictable cash flow

Defensible / strong market positions

Strong management team

Minimal future capital requirements

Potential for operationnal restructuring

Large amount of tangible assets for loan collateral

Clear exit route

Why do you want to explore a career in Private


Better understand companies from an operational prospective

Become actual investors (should be shown as a passion)

What are the exit routes for a Private Equity

investment? Which one usually gives the higher
Secondary LBO
A financial sponsor can often sell a portfolio company to another financial sponsor in a
leveraged buyout transaction known as a secondary buyout. This name derives from the
fact that the LBO is being sold to the next buyer in another, separate LBO.
One possible rationale for this type of exit can be that the financial sponsor and current
management team believe a larger financial sponsor can add value to the portfolio
company as it moves into the next stage of its development. Alternatively, a financial
sponsor may decide to sell the company to another financial sponsor if it has reached its
minimum investment time period and has already created a high rate of return on its
initial investment. Other potential benefits of selling to another PE firm include increased
flexibility in the structure of the sale (where, for example, the seller could potentially
maintain a partial ownership stake and enable the company to continue conducting its
business with the intent of growth in the long term).
However, a financial sponsor is almost always a sophisticated buyer, and thus will try to
purchase the asset at a minimal valuation, typically at a much lower price than would a
strategic buyer. In addition, the attainable sale price could be highly dependent upon
debt market conditions.
The primary benefit of an IPO exit for a portfolio company is the potential for a high
valuation, provided that there is investor demand for equity in the company and stable,
favorable public market conditions. That being said, an IPO involves high transaction

costs. Additionally, if the financial sponsor is looking to fully exit the portfolio company,
potential public investors might view a full exit as a lack of confidence in the future
prospects of the business. Furthermore, the terms of the IPO may prohibit the financial
sponsor from exiting some or all of its position for a period of time (called a lock-up
period). Other potential problems with an IPO exit include the risk of the quality of the
overall public equity market environment, and the likelihood of a discounted price for the
IPO. (An IPO generally is priced at a discount to the expected trading price of the stock
once the IPO is completedtypically about 15%-20% of the equitys expected market
value. This discount is designed to help drum up demand for the new issuance, but it
results in value left on the table by the issuer of the IPO, which directly impacts the
achievable value for the PE firms equity holders.)
Trade sale
A financial sponsor may realize gains in a portfolio company investment via a sale to a
strategic acquirer. This allows for an immediate liquidity event for the financial sponsor.
Strategic buyers typically intend to hold the acquisition over the long-term and thereby
gain a greater competitive advantage and market share in its respective industry. A
strategic buyer is usually a non-PE firm, and the acquisition is in the buyers strategic
interest (whether its for market growth, trade secrets, new products, synergies, or other
business improvements). Therefore the trade sale will usually command the highest sale
price. For these reasons, the sale to a strategic buyer is generally the preferred exit
option for an LBO investor.

Do you know what is the rule of 72?

The rule of 72 allows you to estimate compounded growth rates.
Estimated CAGR = 72/years to Double Money

Walk me through a LBO analysis

1. Build operating model

Build the operating model for the target company. The most important financial
aggregates will be the ones which will allow you to calculate a detailed cash flow before
debt service (payments of debt principal and interests). The LBO transaction implies a
completely new capital structure (more debt and more diverse tranches of debt). You will
want to know if the company can support the new cap structure!

2. Valuation
Once you have the key financials, you need to know how the company is worth. Here its
a usual valuation exercise: comps (precedent transactions and trading comps) and DCF.

3. Sources and uses

When you know how much the company is worth, you need to know how much the
financial sponsor will pay for it in total: dont forget transaction costs its not free to
raise debt and you will have to pay advisors (legal, financial etc..).
This step requires to think about the structure of the transaction: how much debt can you
put in the transaction? What type of debt? And ultimately, what is the equity check (what
the PE shop will have to put on the table)?
You will be able to answer these questions by looking at recent transactions in the same
sector, by judging the appetite of banks in financing the asset etc

4. New capital structure, new set of forecasts

When you have your new capital structure, you can then modify the operating model of
the company: new interests to be paid, new type of debt to be repaid.
The forecasts will start from what is called pro-forma financial (pro-forma for the

5. Credit statistics
Once you have your new set of forecasts, it is very important to know if it works! By it
works, we mean can the company support the heavy amount of debt?. Credit
statistics are some of the most important measures in a LBO, you will calculate ratio such
as leverage or interest cover ratio in order to see 1) if the company can repay the debt
and 2) if the company can repay the debt quickly. If the company cant support the

capital structure you set up, you have to modify it (lower the debt, use other debt
instruments loan, PIK note, high yield bonds etc).

6. Returns
When you have your sustainable capital structure, you need to calculate the returns for
the financial sponsor. 2 key measure of return: 1) Cash on cash (CoC multiple) you
invested 100 and you get back 200 when you liquidate your investment, you made a
2.0x CoC and 2) Internal rate of return (IRR) which a value of return in percentage and
taking into account the factor time.
Bear in mind that expected returns vary in function of the type of financial investor. A
pension fund will expect a 10%-14% IRR while a Venture Capital firm will expect at least

How do you generate returns? How can you

improve returns?
How do you generate returns?

Free Cash Flow generation and debt paydown

Tax shield

Operationnal improvement (EBITDAgrowth and margins improvement)

Mutiple expansion

How to improve returns?

Lower purchase price

Increase exit multiple

Increase the leverage used

Improve margins

Improve key aggregate (EBITDA)

Do you know what is a PIK loan? Why would you

use it?

PIK loan stands for payment in kind and means that in certain circumstances, rather than
pay a coupon in cash, the coupon will be paid in the form of new bonds which are added
to the total amount to be repaid in cash at maturity.
From the companys point of view, the advantages of using PIK loan are as follow:

Increased leverage

Interest paid on PIK loan is tax deductible

Debt under mezzanine arrangements is often payable after certain years (PIK
interest), delaying obligation to buyer

How do you assess leverage capacity for a

The leverage is the amount of debt in a company.
When you decide to assess the leverage capacity of a company, you want to know the
maximum leverage of the company.
When you want to assess a maximum leverage you need to make sure that the company
can repay 1) interest expense and 2) the principal.
To do so, it is important to look at cash flow before debt service, its evolution and
sensitivity to different parameters (sales growth, costs evolution etc). This cash flow
will have to be sufficient to 1) pay interest, 2) pay principal and 3) gives some headroom
to allow the company to grow or face bad situations.
You can back-calculate the maximum leverage by taking the amount you can afford to
give up to the debt holder.
To assess maximum leverage, you need to also look at the market: are companies in this
sector very levered? Are banks landing money to this type of companies?

To assess leverage for a target, the financial sponsor need to be sure that the company
can repay the debt quickly and gives space for equity value creation! If you have too
much debt, equity value might get to 0 if things go badly!

Hows the debt market currently doing? What is

the current pricing for a TLA? TLB?
For this one, it really fluctuates depending on the market. To answer the question how is
the debt market currently doing?, you need to have a look at current government bonds,
do you have countries in distressed? Do banks land money at the moment for levered
transactions (LBOs), is the debt market closed or open?
Unfortunately, we cant give you a straight answer as it will probably change! Have a
look on mergermarket or in the press and you may find some answers!

What is the formula of the IRR?

Assuming that no dividend are paid through the period and do dividend recap:
IRR = [(Equity Value at Exit)/(Equity Value at Entry)]^(1/# of years of the investment) 1

Please walk me through a Sources & Uses table?

Sources of funds: debt and equity
Uses of funds: current debt paydown, paying equity holders, transaction fees etc.
Sum of Sources = Sum of Uses

Looking at returns what kind of sensitivity tables

would you show?
After most analysis, sensitivities are built to test the outputs. In a LBO analysis, the
outputs are the returns (CoC and IRR).
Returns are tested in function of:
Time: it is important to see what the impact is if the participation is sold 3 years after
acquisition or 6 years after
Transaction multiples: what happen if exit multiple are lower, equal or higher than the
acquisition multiple? What can we afford in term of entry valuation?
Operations: this will depend on the asset. Some companies may be extremely seasonal
and will show strong swings in working capital (it will be important to stress this vs.
return) or the investor may be worried about fluctuation in certain raw materials prices
(what happen to the returns if prices increase by 10%?) etc

What are the key points to focus on during a due

diligence process?
What is your competitive advantage?

Product offering Technology

Premium brand

Distribution capabilities

Geographic presence

Disruptive business model

What are the barriers to entry into the business?

What are the costs of switching to a competitors product?

Where does the company fit in the industry value chain?

How has the industry changed over the last 5 years?
How do you expect that to change over the next 5 years?
Who are your main competitors?
From whom have you been gaining/losing market share?
What firm is the biggest threat to your company?
What is the biggest share gain opportunity?
What is the market landscape (fragmented market etc.)? How saturated is the market?
Growth of the market (historical and forecast)? Is the industry mature?
Total addressable market? Any segment of the industry growing faster than others?
Key macroeconomic drivers of the business. Trends?
Have there been any significant changes to the industry landscape (e.g. disruptive new
entrants, consolidation, vertical/horizontal integration, demand/supply imbalance, etc.)?
What are the regulatory concerns and how can it adversely affect the business?
# of customers? Sales generated by the top 30 customers?
Length of a customer relationship? What is a typical renewal rate?
Key decision makers for the customers? Buying dynamics? Length sales process?
# of suppliers? Supplier bargaining power?
Can price increases from the suppliers passed through to the customers?


Is the business capital intensive? What percentage of capital expenditures is growth
capital vs. maintenance Capex?
Fixed vs. variable costs?
Minimum cash requirement?





Do you know what is operating leverage?

Operating leverage is related to the composition of the cost structure: fixed costs vs.
variable costs. In other words, it is a measure of how revenue growth translate into
operating income (EBIT) growth.

High operating leverage

It means the companys cost base has a strong proportion of fixed costs. If Revenue
increase, it will less and less be used to cover the costs and more and more dedicated
to cover the operating profit and generate more margin.

Low operating leverage

The companys cost base has a low proportion of fixed costs and a high proportion of
variable costs. If sales increase, margin growth will not be as high as in the case of a
company with high operating leverage.

Based on the information memorandum you

received from the sell-side adviser the IRR given
by your LBO model is c. 15%. What can you say?

First an information memorandum is a 50-to-100 page book on the company to be sold.

You will find in it financial information (historical and forecast), market overview,
strategy, management team etc
If it come from the sell-side advisor, its a marketing document, so it will be fairly
optimist in term of projections.
Lets consider you are a regular private equity firm, you will target roughly 20%-25% IRR.
So if, with very optimistic number you get a 15% IRR in your model, it probably means
the investment would not work for your investor profile.
You can ask additional questions to the seller to clarify the situation (as you dont make
investment base on excel), but you would probably exit the process or bid very low (as
other buyers could have the same approach).

Do you know what a cash sweep is?

A cash sweep is the use of excess free cash flow to repay debt. It means that there is no
fix planned repayments for the debt, instead, whenever the company generates an
excess in cash (above an agreed threshold), this excess cash is used to repay the debt.

Do you know what a RCF is?

A Revolving Credit Facility (RCF) is a line of credit where the Company pays a
commitment fee and is then allow to draw on the facility whenever it has a need
(generally operating need).
It means that the Company will pay a fee, to be able to borrow money (the amount is
capped) whenever it wants, to finance particular swing in working capital or other
operating needs. When the Company draws on the RCF (for example 20m out of a 50m
RCF), it will pay interest on the drawn amount and will continue paying the commitment
fee on the undrawn amount (30m).

The company repays the drawn amount whenever it can (as it is the most expensive part
of the RCF, vs. undrawn amount).

What are the key value drivers of an LBO?

A leveraged buyout (LBO) is an acquisition which is heavily financed by debt. It means
the acquisition will require less equity contribution (the equity check).
LBO are usually structured by financial sponsors which can play with 3 main leverage or
value drivers (time is a strong factor in LBO transaction, so the faster you generate value,
the better):

Financial leverage
As mentioned, the transaction is heavily levered. The main assumption is that the
acquired company will be able to repay the debt along the holding period. If the debt is
repaid and the EV of the company remains constant, the transaction generates value for
the equity holder:

Operating leverage
If the company grows and expand during the holding period, it will generate value for the
equity holder. If the company was acquired when it had an EBITDA of 10m and sold with
an EBITDA of 15m and everything else remains equal, equity holders are winners:

Multiple expansion
If the acquired company is in a sector which is not particularly popular, acquisition
multiples may be low. If 5 years after acquisition the sector became hot, acquisition
multiples may be higher:

What is usually more expensive? Bank debt or

High Yield debt?
Usually bank debt is cheaper than high yield debt. It will be cheaper because less risky
than high yield debt (junk bonds). Bank debt will be more senior so in case of
liquidation, banks will receive the money first. In addition, bank debt will be more likely to
be secure against the company assets.

Sector Wise

1.) Investment & Finance Sector Analysis

The major Non Banking Financial Companies (NBFCs) in India have their relative specializations, for
e.g. HDFC (mortgage loans), IDFC (infrastructure loans), Mahindra Finance, Power Finance
Corporation (power financer) & Shriram Transport Finance (auto loans). The trend of segmental
monopoly is changing as banks are entering long-term finance and FIs also meeting the medium and
short - term needs of the business masses

Today, NBFCs are present in the competing fields

of vehicle financing, housing loans, hire purchase,
lease and personal loans. NBFCs have emerged
as key financial intermediaries particularly for
small-scale and retail sectors. With easier sanction
procedures, flexibility, low operating cost and focus
on core business activity, NBFCs stand on a surer
footing vis-a-vis banks. Therefore, the credit needs
of customers are met adequately.

NBFCs' growth had been constrained due to lack

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

NBFCs are not required to maintain cash reserve

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

Key Points
Plenty to meet personal finance needs but not enough to meet long-term
infrastructure needs.
India is a growing economy, demand for long-term loans, especially

infrastructure and personal finance is high

Barriers to entry
Licensing requirement, investment in technology, skills required for project
finance, distribution reach, minimum capital requirements, etc
Bargaining power of
Providers of funds could be more demanding, base rate requirements are
applicable. As quality of services provided with minimum time matters a lot.
Bargaining power of
High, as banks have also forayed into long-term finance and consumer
High. There are public sector, private sector and foreign banks along with
non-banking finance companies competing in similar markets.

Financial Year'13

FY13 has proved to be a challenging year on account of subdued economic activity, high interest

rates, rising fuel and vehicle prices for the auto financiers. With slowdown in economic conditions,
most of the auto space segments reported either a tepid credit growth or a decline in volumes.
The cumulative production for the entire automobile sector was recorded at meager 1% for FY13
and the sales volume too witnessed a decline. Furthermore, the worrying part today for auto
financiers is the new RBI guidelines that require NBFCs to move to the asset classification and
provisioning norms as applicable to banks commencing form FY15.

Likewise, FY13 proved a challenging year for the infrastructure financiers too. As the domestic

saving and investments plummeted, the private investment in infrastructure came to almost a
standstill. Regulatory uncertainties, policy issues, execution challenges and eroding confidence
impacted the business dynamics of the infrastructure finance companies. Power sector was the
worst affected on account of significant unutilized capacity and fuel shortages. That said, with the
much required headway made by CCI in fast-tracking key projects and administering clearances,
the infrastructure sector has seen the light of the day.

For housing companies, the fiscal incentives provided in the 2013-14 Union Budget brought

respite to the first time homebuyers who are now allowed an additional one-time benefit of interest
deduction up to Rs 100,000 on a home loan. Regulatory forbearance, doing away with teaser
products and creditworthiness of developers will go a long way in bringing stability in the housing
sector. With mere 8% mortgage to GDP ratio of India, it leaves huge market potential for housing
financiers to strengthen their footing in the financing market. Furthermore, with rising disposable
incomes, increasing urbanization and improving demographics, worst is behind for the housing
finance market in India.

Given the euphoric profit generation by gold-financiers in past couple of years, the RBI took a

cautious stance. The new stringent RBI guidelines are expected to result in decline in profitability
of gold loan companies. Fear of business concentration risks and business run-downs and the
motive to safeguard the interest of the borrowers have prompted the regulator to turn extra-vigilant

with respect to gold financing business.

The Reserve Bank of India is in the process to grant additional branch licenses to private sector
banks and NBFCs that meet the central bank's eligibility criteria. These new licenses should be
awarded shortly. Many NBFCs, microfinance companies and industrial houses have applied for
the same.

FY13 also witnessed increased funding cost pressures and negative asset-liability match that
dampened the earnings performance of NBFCs.



The RBI is looking at monitoring the NBFC sector to a greater extent now, especially on account
of the sharp increase in finance to the space. This is primarily due to the higher possibility of risks
getting transferred from the more leniently regulated NFC sector to the banking sector and
concerns over protection of depositors' interests.

As at the end of March 2013, the total credit managed by NBFCs stood at Rs 3.25 trillion (Source:
ICRA) reporting a sharp decline of 10% vis-a-vis previous year.

Asset quality trends began to deteriorate in FY13 after witnessing an impeccable improvement
during 2009-12.

Cost of funds for NBFCs remained elevated for major part of FY13 given the higher proportion of

bank funding in the overall borrowings. With higher base rates of banks, the funding costs are
expected to remain high even in the coming periods. That said, few NBFCs managed to contain
costs by raising funds through pass through certificates (PTC) routes by securitizing pools that
qualify for priority sector lending at attractive rates.

The credit costs for NBFCs continued to rise in commensurate with the rise in delinquencies

during FY13. Moreover, operating costs are also expected to remain elevated on account of
rigorous recovery efforts and slower growth.

Therefore, unless the NBFCs increase their lending rates and improve operational efficiencies, the
return ratios are expected to remain under pressure.

Currently, housing finance companies are in favor given the positive asset-liability position, limited
asset quality risks and modest return ratios.

However, the other asset financier such as the infrastructure and automobile financiers, the

scenario still stands grim. Subdued economic environment, higher loan-to-value (LTV) ratios and
profitability pressures faced by the CV users have spurted asset quality risks for NBFCs.
Moreover, higher interest rates, negative asset-liability position, declining collection efficiencies
and increase in re-possession rates have marred the performance of these asset financiers.

We believe, going ahead, defying the macroeconomic headwinds, NBFCs with retail focused
business models backed by penetration in hinterlands should show up robust performance.

2.) Aluminium Sector Analysis Report

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

The aluminium production process can be categorized

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

Power is amongst the largest cost component in

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

The Indian aluminium sector is characterised by large

integrated players like Hindalco and National
Aluminium Company (Nalco). The other producers of
primary aluminium include Vedanta Resources Plc

The principal user segment in India for aluminium

continues to be electrical & electronics sector followed
by the automotive & transportation, building &
construction, packaging, consumer durables, industrial
and other applications including defence.

Key Points

Supply of aluminum is in excess and any deficit can be imported at low rates of duty.
Currently, the demand is stable while supply is in excess.


Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low
per capita consumption in India. Also, demand for the metal is expected to pick up
as the scenario improves for user industries, like power, infrastructure and

Barriers to

Large economies of scale. Consequently, high capital costs.

power of

Most domestic players operate integrated plants. Bargaining power is limited in case
of power purchase, as Government is the only supplier. However, increasing usage
of captive power plants (CPP) will help to rationalize power costs to a certain extent
in the long-term.

Being a commodity, customers enjoy relatively high bargaining power, as prices are
power of
determined on demand and supply.
Competition Competition is primarily on quality and price, as being a commodity, differentiation is
difficult. However, the recent spate of consolidation has reduced the competitive
pressure in the industry. Further, increasing value addition to aluminium products
has helped some companies protect themselves from the high volatilities witnessed
in this industry.
Financial Year '14

The major commodity demand driver China, (that accounts for over 40% of global demand in
Aluminium and Copper) slowed down considerably on fears of hard landing for the economy. India
too, suffered on account of monetary tightening and subdued investment and growth climate with
industry/GDP growth slowing down considerably.

Global Aluminum demand growth normalized to around 5% in 2012, after a sharp growth in the
preceding two years on the back of global recovery from the 2009 crisis. Worlds leading
manufacturer Alcoa expects demand growth to be in the region of 7% in 2014. In 2014, Chinas,
North Americas and Europes growth is expected to be in the region of 10%,5% and 1%

The industry continued to be plagued by high inventories, which has been a huge overhang on the
prices. Cost of production for most aluminium players continued to remain high due to challenges
pertaining to energy inputs and resources.

India with its abundant supply of quality bauxite and low cost labour has established itself as a low
cost producer of primary aluminium. However, in India, the production of primary aluminium has
stagnated around the 1.6 to 1.7 MT mark for the last three years. The three primary aluminium
producers, viz. Hindalco, Vedanta and Nalco have expansion plans as well as greenfield projects
that should increase the production in the foreseeable future.

China has been a marginally surplus producer of aluminium, while India turned aluminium deficit
in 2011 after being a marginal surplus producer for many years. However, commissioning of new
capacities will make India surplus in aluminum in the near future.

Long term outlook for aluminium continues to remain strong with Global aluminium demand
expected to increase at a CAGR of 6%, with expected growth of 9% till 2020. This growth rate,
though strong, pales in comparison with the stupendous rate at which Chinese aluminium
consumption has grown over the last decade.

? The supply is expected to remain strong as several producers continued to produce despite low
LME. High physical premiums too worked as an incentive to continue production. Global
Aluminium production is expected to grow at a rate matching production increase which will come
from China and Middle East. Production from both these regions is expected to grow at around 89%.

3.) Auto Ancillaries Sector Analysis Report

The fortunes of the auto ancillary sector are closely linked to those of the auto sector. Demand
swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on
auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well
as the replacement market.

Margins in the replacement market are higher

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

Indian auto ancillary sector has traditionally

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

Lower labour costs give Indian auto ancillary

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

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

power of

Low with OEMs. Relatively high in the replacement market

Companies operating in the export market face competition at a global level.

At the domestic level, market structure is fragmented for a large number of
ancillary products. Most companies adopt low cost and differentiation
strategies. In some products (like batteries), only two or three companies
control over 80% of the market.

Will intensify, as global players will enter the market leading to consolidation.
Dereservation of SSI will result in access to capital and technology
Financial Year '14

If FY13 was a tepid year for the Indian automotive industry, FY14 did even worse what with
key segments like passenger vehicles and commercial vehicles witnessing strong YoY
declines. Overall, weak sentiments, high cost of ownership, high interest rates and high fuel
prices affected demand.

As a consequence, the Indian automotive industry posted a decline of 9.3% in FY14. Exports
on the other hand did relatively well, remaining flat for the car segment while growing around
7% in the two-wheelers space. This was on the back of a revival in the US market and certain
new growth drivers in the emerging markets including Africa.

Just like the auto industry, the auto ancillary industry witnessed a slowdown during the fiscal.
Capacity utilization fell on account of the downturn in the auto industry. Besides, with Europe

and US remaining weak economically during the first half of the fiscal, even exports could not
shore up the revenue profile much.

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

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

In the long term, the growth of this sector will depend partly on pace of indigenization levels
across all segments. The prospects look bright as most companies are increasing the
indigenous components, in an effort to reduce their currency losses and remain competitive.
Also, the fact that auto manufacturers like Ford, Hyundai and Maruti are exporting cars, make
the prospects look encouraging.

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

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

4.) Automobiles Sector Analysis Report

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

Demand is linked to economic growth and rise in

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

While the industry is highly capital intensive in nature

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

As compared to their global counterparts, both the

two-wheeler as well as four wheeler segments are
relatively lesser fragmented. However, things have
changed, especially on the passenger cars front as
many foreign majors have entered the Indian
market. As a result, pricing power is likely to diminish
going forward.

Automobile majors increase profitability by selling

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

Key Points

The Indian automobile market has some amount of excess capacity.


Largely cyclical in nature and dependent upon economic growth and per
capita income. Seasonality is also a vital factor.

Barriers to entry

High capital costs, technology, distribution network, and availability of auto

Bargaining power of
Bargaining power of

Low, due to stiff competition.

Very high, due to availability of options.
High. Expected to increase even further.

Financial Year '14

A total of 16.9 m two-wheelers were sold in FY14, a growth of a tepid 7% over the previous year.

The slow growth was on account of the overall slowdown in the Indian economy and firm interest
rates and fuel prices that dampened demand. Motorcycles accounted for 74% of the total two
wheelers sold and grew by a mere 4% YoY. The scooters (geared & ungeared) segment was the
star of the two wheeler industry logging in a growth rate of 22% YoY. In the domestic market, the
3-wheeler segment did badly as volumes were down 11% YoY, but the exports growth was strong
at 17% YoY.

It was a second consecutive challenging year for the medium and heavy commercial vehicles

(M/HCVs) segment as volumes plunged by 25% during the fiscal given the sluggishness in
industrial activity and low freight rates. LCVs were at the receiving end as well as volumes
dropped by 17.6% YoY. As a result, volumes for the overall CV industry fell by 20% YoY. The HCV
industry is highly cyclical and because the industrial and construction sectors slowed down, its
effect was felt on HCVs as well. Both Tata Motors and Ashok Leyland faced heavy challenges
during the year given that both of them corner a significant chunk of the CV pie.

Tractors did very well during the year as monsoons in 2013 were quite healthy and M&M, which is
a market leader in the tractors space, benefitted from this as its auto division faced rough

Passenger vehicles (PV) also did badly as volumes declined by 6%. Slowdown in the economy,
firm interest rates and fuel prices had an adverse impact on demand. This time the decline was
seen across the segments of the PV space viz., passenger cars, utility vehicles (UVs) and vans.
Maruti Suzuki, which is the market leader in the PV space, was not spared either and saw its
volumes fall.

As volumes took a beating, few of the companies did manage to report an improvement in
operating margins largely on account of various cost rationalization measures undertaken.


Given that the Modi government has now come into power, there are expectations of increased

focus on reforms and ramp up in infrastructure. Thus, government spending on infrastructure in

roads and airports and higher GDP growth in the future will benefit the auto sector in general. We
expect a slew of launches both in passenger cars and utility vehicles (UVs) given that the
competition has intensified. Since diesel prices have also been hiked, the differential between
petrol and diesel will reduce further and this will play an important bearing on a consumers
purchasing decision.

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

Though the market size is expected to grow by 10% to 12%, competitive pressure could keep

prices and margins under control. TVS, Honda and Hero Motocorp are poised to benefit from
higher demand for ungeared scooters in the urban and rural markets. The 3 wheeler industry,
where Bajaj Auto is the market leader, is also poised for growth on the back of new permits
opening up and increase in exports.

While good monsoon is a positive for the tractor sector, given the fact that non-farm incomes have

continued to climb up, volumes should still hold up well in the longer run despite a year or two of
poor monsoons. The longer-term picture is impressive in light of poor mechanisation levels in the
countrys farm sector and the thrust of the government on improving rural infrastructure.

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

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

5.) Banking Sector Analysis Report

The global slowdown has taken its toll on Indian economy. Besides, the domestic economy too is
having its own set of problems. High inflation, subdued growth, slowing investments, undesirable
current account deficit levels, high fiscal deficit and battered currency have together made the growth
visibility rather muted. The banking sector, being the barometer of the economy, has succumbed to
these challenges. Amidst this challenging scenario, the Indian banking system is continues to deal
with improvement in operational efficiency and execution of prudent risk management practices.

RBI's hawkish monetary policy stance in order to

combat inflation has led to sharp increase in
interest rates during FY13. The elevated costs of
deposits and limited pricing power ensured
margin pressures for most of the banks for major
part of FY13.

Indian banking industry, valued at Rs 77 trillion

(Source: IBEF), is growing at a slower pace and
plagued by bad loans. In what could be termed as
a challenging year, FY13 witnessed steep
increase in bad loans of Indian banks and turning
them skeptical to extend loans to companies. As
a share of sector loan book, the bad loans have
gone up from 1.3% in March 2009 to 3.4% in
March 2013. Public sector banks that account for
60% of the total banking assets have been the
worst hit vis-a-vis its private and foreign

Key Points

Liquidity is controlled by the Liquidity is controlled by the Reserve Bank of India


India is a growing economy and demand for credit is high though it could be

Barriers to entry

Licensing requirement, investment in technology and branch network, capital

and regulatory requirements.

Bargaining power High during periods of tight liquidity. Trade unions in public sector banks can
of suppliers
be anti reforms and orchestrate strikes. Depositors may invest elsewhere if
interest rates fall.
Bargaining power For good creditworthy borrowers bargaining power is high due to the
of customers
availability of large number of banks.

High- There are public sector banks, private sector and foreign banks along
with non banking finance companies competing in similar business segments.
Plus the RBI is all set to issue new banking licenses soon.

Financial Year '13

The Central Statistical organization (CSO) reported the lowest real GDP growth at 5% during
FY13. This growth stands lowest in the decade and even weaker than the recorded during the first
year of global financial crisis. Banking sector, being inextricably linked to the economy, stood in a
state of limbo for major part of FY13.

During FY13, the gross bank credit grew at a slower pace recording 15.1% YoY growth as against

17.3% a year ago. The numbers also stood below RBI's projections for FY13. Sluggish demand
conditions, weak monetary policy transmission, poor asset quality and debilitating macroeconomic conditions led to lower credit growth during FY13.

Except retail, the slowdown in credit was witnessed across sectors such as agriculture, industry

and service segments. The RBI data reveals that retail trade and credit card outstanding were the
only buoyant segments during FY13. Mid-sized businesses and loans for professional services
were the worst hit.

Against a backdrop of GDP growth deceleration, weak IIP data and persistent inflation during

FY13, banks became more risk averse to lending credit. This deceleration also reflected banks'
risk aversion in face of rising NPAs and increased leverage of corporate balance sheets. The
deceleration was observed across all bank groups, being high for PSUs and private sector banks,
which jointly account for above 90% of the total bank credit.

The RBI had administered a 1% repo rate cut and injected liquidity through CRR and SLR cuts as

also through open market operations during FY13. However, banks have only cut their base rate
by meager 0.25%-0.30% owing to the liquidity constraints and weak deposit growth.

The aggregate deposits grew marginally to 14.2% at the end of March 2013 as against 13.8% in
FY12. The growth differential between deposit and credit continued to hover between 2-3% with
deposit growth outpacing the credit growth. The credit-deposit ratio was recorded at 78.1% during
the same period. This ensured tight liquidity conditions during the whole of the FY13.

CASA, the cheap source of funds for banks, also remained sluggish for the major part of FY13.

The elevated interest rates during FY13 led to migration of money from CASA deposits to fixed

Slower loan growth and weak CASA accretion resulted in margin (NIM) pressures for the banking
industry. Furthermore, lower NIMs combined with higher credit costs that were earmarked for the
bad and restructured loans dampened the earnings performance of Indian banks during FY13.

The sharp industrial slowdown during FY12 and FY13 took a toll on the asset quality of the banks.

Gross NPAs of 40 listed banks went up by 43.1% from levels a year ago. The restructured book
also spiked up dramatically with recast assets under CDR standing around 50% more than the
previous year. The repercussions were largely felt by public sector banks as they were the ones to
support the productive sectors of the economy.

Private sector banks, on the other hand, were better placed than its PSU peers during FY13.

Better asset quality, higher margins and strong loan growth boosted the performance of private
banks during the same period.


Going forward in FY14, the Economic Advisory Council of Prime minister expects the economic
growth to rise to 6.4% from the current 5% on the back of the recent structural measures and
normal monsoons.

Growth is still a concern for the banking sector on account of a sustained slowdown in the

economy as well as reduced demand for credit on account of the current high interest rate
environment. Sectors such as iron & steel, textiles, power generation, automobiles and ancillaries,
telecommunication, aviation, construction, real estate, infrastructure, steel and cement are
expected to throw-up challenges in terms of asset quality pressures for the forthcoming periods.

The domestic economic slowdown will continue to play spoilsport resulting in increase in nonperforming loans and restructured loans especially for PSU banks. Given the greater stress
expected to confront PSU lenders going forward, the margins and earnings performance are
expected to take a hit. Given the core earnings standing extremely low for PSU banks, their
balance sheets will be victim of higher credit costs, higher liabilities on account of wage revisions
and wider MTM losses due to rising yields.

As per regulatory requirements Indian banks need to shore up their capital base to adhere to the

incumbent BASEL III norms. With PSU banks falling short of the target, a consistent annual equity
infusion of Rs 160-180 bn is expected to flow from government over the next 5 years. As per the
FY13 budget, the government of India had allocated Rs 127 bn for capitalization of PSU banks
and plans to invest Rs 140 bn in FY14.

Going by the dynamic nature of the real economy, it is imperative that the banking system will
require being flexible and competitive. Notwithstanding the expanding branch network of Indian
banks, the banking penetration still stands low in comparison to the global benchmark. Hence, the
pressing need for financial inclusion and the issuances of new banking licenses to the private
sector will continue to take precedence even in FY14. The RBI is in the process of issuing new
bank licenses to those private players that would stand consistent with the highest standards of
transparency and diligence. Moreover, necessary reforms, regulations for free entry and making
the licensing process more frequent also forms the agenda of the RBI for the coming periods.

6.) Beverages, Food & Tobacco Sector

Analysis Report
India is the world's second largest producer of food after China. It is the largest producer of milk,
second largest producer of fruits and vegetables and the third largest fish producer in the world.
Armed with a huge agriculture sector, abundant livestock and cost competitiveness, India is fast
emerging as the sourcing hub of processed food. As per Indian Council of Agricultural Research, the
food processing industry was valued at $121 bn in 2012 and is expected to reach $194 bn by 2015.
Food processing currently enjoys a share of less than 10% of production while for the countries; the
processing share is 30%-50% with developed countries having a share of almost 100% (Source:
McKinsey & CII report).

The food processing industry is segmented into

dairy, fruit & vegetable processing, grain
processing, meat & poultry processing, fisheries
and consumer foods that include packaged
foods and beverages. The industry is
characterized by a huge presence of small scale
operations with the unorganized sector forming
70% share by volume and 50% share by value.
The dairy sector, which has the highest share of
processed foods, is dominated by unorganized
players. A few corporate players including
MNC's such as Nestle and Britannia have
forayed into emerging segments such as Ultra
Heat Treated (UHT) and flavoured milk. Even
ITC wants to enter the dairy sector in a big way.
In fruits and vegetables, juices and pulp
concentrate are largely manufactured by the
organized sector whereas traditional items such
as pickles, sauces and squashes are
manufactured by the unorganized sector.

The cigarette industry faces discriminatory

taxation. This is reflected in the fact that though
cigarettes account for only 15% of the total
tobacco consumption (including non-smoking
forms such as bidi, gutkha, khaini and zarda), it
contributes over 74% to the government
exchequer in the form of tax revenues. Excise
duty on cigarettes accounts for more than 50%
of its selling price. The cigarette industry is not
only subject to frequent revision in excise duty
but faces differential VAT rates in various states.
A plethora of 29 different tax rates are applicable
on cigarettes across states in India that has
compelled manufacturers to adopt state specific

Key Points
Abundant supply through a distribution network of over 8 m stores across the
country. Distribution networks are being strengthened in the rural areas. Tobacco
enjoys high penetration even in rural areas as bidis are manufactured by the
unorganized sector.
Processed food demand is growing at a robust pace. Rising contribution of
women to the working force and growing nuclear families has led to higher
demand for convenience foods, especially in urban areas. Tobacco demand
being habit-forming is largely inelastic.
Barriers to entry
Huge investments in establishing brand identity and setting up distribution
networks. Cigarettes, in addition, suffer from punitive taxation policies of
power of

power of

Suppliers being small and fragmented have limited bargaining power. Companies
like ITC source their agri-inputs internally thereby reducing their dependence on
suppliers. Most tobacco companies have integrated backwards and have their
own supply chains. Therefore, the bargaining power of suppliers is not high.

In packaged foods, the bargaining power of customers is restricted to the mass

or the lower end of the price segment which is price-sensitive. As tobacco
consumption is more or less a habit, the bargaining power of consumers is only
to the extent of choice of the brand.

Domestic unorganized players pose competition. The recent inflationary
environment has led to increased demand for private label brands that are
available at a discount. In case of tobacco, branded cigarettes, bidis and
contraband compete with each other.
Financial Year '14

In FY14/CY13, food and beverage companies reported a mixed financial performance. Nestle's

topline growth in CY13 slipped to single-digits for the first time in eight years on sluggish volume
growth. Due to sluggish coffee sales, Tata Coffee reported a 1.2% fall in sales whereas Tata
Global Beverages saw its topline grow by a muted 5.3% in FY14. Britannia has posted a robust
11.8% growth in revenues. Glaxo SmithKline Consumer Healthcare (GSKCH) registered a huge
53% jump in its sales for the 15-month period as the company is changing its financial year from
December to March ending. Both cigarette companies ITC and VST Industries clocked robust
growths of 11% and 18%, respectively in FY14.

Easing commodity prices have enabled companies like Britannia and ITC to post incremental

margins whereas GSKCH and Tata Coffee have managed to keep margins in-tact. However
Nestle saw its operating margin contract by 0.7% due to higher ad-spends and other expenses.
Even Tata Global Beverages reported lower operating margin due to fall in profitability of coffee
segment. Barring Tata Coffee and Tata Global Beverages, all companies reported robust growth in
profits. Nestle saw a subdued 4.6% profit growth due to higher interest and depreciation charges
and increased provisioning.
Future Prospects:

Backed by growing population and rising affluence, India's overall food consumption is expected

to increase by 4% from Rs 11 trillion in 2010 to Rs 23 trillion in 2030. The per capita consumption
is expected to rise by 3% from Rs 9,355 to Rs 15,731 over the same period. The packaged food
industry has been forecast to grow by a faster 9% to reach Rs 6 trillion by 2030 (Source:
McKinsey & CII report). Demand drivers such as urbanization, increase in the number of nuclear
families and growing number of working women, higher disposable income and the changing
consumption pattern are likely to boost demand for processed foods. Widening reach of organized
retail will also boost growth.

To attract investments, the government has allowed 100% FDI in the food processing industry.
Additionally, an income tax deduction of 100% of profit for five years and 25% of profit for the next
five years is allowed in case of new agro processing industries. Also machinery used in the
installation of cold stores has been fully exempted from excise duty.

Punitive taxation on cigarettes has risen with steep hikes in excise duty for three years in a row. In

the recently announced Budget for 2014-15, the the micro (< 65 mm) and regular (65-70 mm) filter
segments were subject to steep increase in excise duties by 72% and 17%, respectively. The
excise increases in the long (70-75 mm) and kingsize (75-85) segments were 11% and 21%,
respectively. The government maintains a strong stance against cigarette smoking as proposals
such as ban on sale of loose cigarettes, higher fines of Rs 20,000 on public smoking and raising
the age limit on smoking from 18 to 25 years are in consideration.

7.) Cement Sector Analysis Report

The Indian cement industry is the 2nd largest market after China accounting for about 8% of the total
global production. It had a total capacity of over 360 m tonnes (MT) as of financial year ended 201314. Cement is a cyclical commodity with a high correlation with GDP. The housing sector is the
biggest demand driver of cement, accounting for about 67% of the total consumption. The other
major consumers of cement include infrastructure (13%), commercial construction (11%) and
industrial construction (9%).

The Indian cement industry grew at a

commendable rate in the previous decade,
registering a compounded growth of about 8%.
However, the growth slowed down in the period
2011 to 2013 when cement consumption grew at
an average rate of 4%. Moreover, the per capita
consumption of cement in India still remains
substantially low at about 192 kg when compared
with the world average which stands at about 365
kg (excluding China). This underlines the
tremendous scope for growth in the Indian cement
industry in the long term.

Cement, being a bulk commodity, is a freight

intensive industry and transporting it over long

distances can prove to be uneconomical. This has
resulted in cement being largely a regional play
with the industry divided into five main regions viz.
north, south, west, east and the central region.
The Southern region of India has the highest
installed capacity, accounting for about one-third
of the country's total installed cement capacity.

Key Points

The demand-supply situation is highly skewed with the latter being significantly


Housing sector acts as the principal growth driver for cement. However,
industrial and infrastructure sectors have also emerged as demand drivers.

Barriers to entry High capital costs and long gestation periods. Access to limestone reserves (key
input) also acts as a significant entry barrier.
power of

Licensing of coal and limestone reserves, supply of power from the state grid etc
are all controlled by a single entity, which is the government. However,
nowadays producers are relying more on captive power, but the shortage of coal
and volatile fuel prices remain a concern.

power of

Cement is a commodity business and sales volumes mostly depend upon the
distribution reach of the company. However, things are changing and few brands
have started commanding a premium on account of better quality perception.


- Intense competition with players expanding reach and achieving pan India
presence. The industry is a lot more consolidated than a couple of decades ago
with a few large players controlling substantial market share.

Financial Year '14

During the financial year 2013-14 (FY14), India's cement industry grew by 3-4% year-on-year

(YoY). The subdued growth was mainly attributable to slowdown in construction activities,
regulatory delays in infrastructural projects, high interest rates, prolonged monsoons and natural
disasters such as floods and cyclone in some parts of the country.

The industry witnessed high operating costs, including all major cost heads such as raw materials,

energy and freight. The steep depreciation of the rupee and hike in rail freight and diesel prices
further aggravated the concerns.


Cement demand is closely linked to the overall economic growth, particularly the housing and
infrastructure sector. Given the Modi governments thrust on housing and infrastructure
development, cement demand is expected to pick up in the coming times. The weakness in the
international crude oil prices and other commodities should help bring costs under control and

improve profitability of the sector. If inflation comes under control, a likely lowering of interest rates
would be a big positive for the cement sector.

While temporary challenges remain in the form of excess capacity, the long term drivers for
cement demand remain intact. Higher government spending on infrastructure, robust growth in
rural housing and rising per capita incomes are likely to augur well for the cement industry.

8.) Construction Sector Analysis Report

India is on the verge of witnessing a sustained growth in infrastructure build up. The construction
industry has been witness to a strong growth wave powered by large spends on housing, road, ports,
water supply, rail transport and airport development. While the construction sector's growth has fallen
as compared to the pre-2008 period, it has picked up in the recent past. Its share as a percentage of
GDP has increased considerably as compared to the last decade. To put things in perspective, the
total investment in infrastructure - which in this case also includes roads, railways, ports, airports,
electricity, telecommunications, oil gas pipelines and irrigation - is estimated to have increased from
5.7% of GDP in 2007 to around 8.0% by 2012. The Planning Commission of India has proposed an
investment of around US$ 1 trillion in the Twelfth five-year plan (2012-2017), which is double of that
in the Eleventh five-year plan.

From a policy perspective, there has been a

growing consensus that a private-public
partnership is required to remove difficulties
concerning the development of infrastructure
in the country. Given that the resource
constraints of the public sector will continue to
limit public investment in infrastructure in
infrastructure investments, - especially
backward and rural areas - the PPP based
development will be needed wherever
feasible. At the same time, reviewing the
factors that constrain private investments
would be necessary to encourage and speed
up the process. The share of private
investments is expected to increase to half in
the Twelfth five-year plan as compared to the
intended 30% for the Eleventh five-year plan.

The real estate industry comprising of

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

The construction sector is a major

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

Key Points

The past few years has seen a substantial increase in the number of
contractors and builders, especially in the housing and road construction


Demand exceeds supply by a large margin. Demand for quality infrastructure

construction is mainly emanating from the housing, transportation and urban
development segments.

Barriers to entry

Low for road and housing construction. However, high working capital
requirements can create growth problems for companies with weak financial

Bargaining power
of suppliers

Low. Due to the rapid increase in the number of contractors and construction
service providers, margins have been stagnant despite strong growth in

Bargaining power
of customers

Low. The country still lacks adequate infrastructure facilities and citizens have
to pay for using public services.


Very high across segments like road construction, housing and urban
infrastructure development. Relatively less in airport and port development.

Financial Year '12

The construction industry witnessed a slowdown in FY12, after the economy showed some

resilience in the preceding two years. With the overall GDP growth slowing down, the growth in
the construction industry dipped to 4.8% in FY12. In addition, the high levels of inflation led the
RBI to keep the interest rates high, thereby reducing investments. Project financing also became
difficult on the back of the increasing gestation periods of the projects, thereby leading financial
institutions to take a cautious approach towards funding projects in the sector.

The 2012-12 budget saw the government double the financing limit of financing infrastructure

projects to Rs 600 bn. For the power and coal sector, the Government proposed External
Commercial Borrowings (ECB) to part finance rupee debt of existing power projects. To encourage
PPP in road construction projects, the budget proposed to allow ECB for capital expenditure on

the maintenance and operations of toll systems for roads and highways.

FY12 was a challenging year for the Indian real estate sector marked by declining volumes, over

supply (in certain pockets) and lack of sustained economic activity. The leasing business
witnessed a slowdown on factors such as oversupply, lower foreign investments and poor
domestic triggers. The retail segment however witnessed a mixed year as overcapacities got
absorbed. As for the residential segment, the same remained muted. The trends varied in different
markets with some witnessing price correction and other seeing higher volume growth.

On an overall basis, companies from the real estate and construction sector faced issues related

to higher interest costs on the back of leveraged balance sheets. The Reserve Bank of India kept
the interest rates on the higher side due to concerns over the high inflation levels. Towards the
end of the year, a handful of companies announced plans to improve the health of their balance
sheets by selling off their stakes in the non-core businesses and improving the cash collection
cycles, launching and bidding for projects on a selective basis, amongst others.


India requires quality infrastructure. This simple fact is the long term driver of the construction

sector as infrastructure investments are the most important growth driver for construction
companies. While short term factors will keep the sentiments subdued, over the long term,
demand will remain strong. The proposed increase in allocation in the twelfth five-year plan (20122017) will translate into a healthy business for construction companies. .

Demand-supply gap for residential housing, favourable demographics, rising affordability levels,
availability of financing options as well as fiscal benefits available on availing of home loan are the
key drivers supporting the demand for residential construction. According to a technical committee
set up by the Ministry of Housing & Poverty Alleviation, the total housing shortage in the country
stood at about 18.78 m at the start of the twelfth five-year plan. This provides a big investment
opportunity. The commercial segment however is going through a tough phase and is likely to do
so in the short to medium term on account of overcapacity.

While long-term factors are likely to work in favour of the real estate developers, the outlook for

the short term remains uncertain. High interest rates and negative consumer sentiments continue
to impact business for the real estate players. Also, the fact that banks have been turning cautious
towards rescheduling debt or issuing fresh loans to real estate companies is a dampener for the
sector. The overall long term risks also include increased prices of the essential raw materials like
cement, bricks and steel coupled with the increasing in labour costs, which together make for
almost 75% of overall construction cost. Liquidity is also another factor that will determine overall
project execution. While entry into affordable housing by many players would curb the declining
trend of the topline as witnessed during the downturn, it is likely to put pressurize on margins.

9.) Consumer Products Sector Analysis

The consumer products industry had been witnessing robust growth in the past few years backed by
strong economic growth and rising rural income. Factors such as rapid urbanization, evolving

consumer lifestyles and emergence of modern trade were driving its growth.

The industry is still urban-centric with majority of the

goods being consumed by urban India. Metropolitan
cities and small towns (population of 1-10 lakh) have
been driving FMCG consumption in urban India since
2002. In fact, middle India, comprising of small towns,
has been growing the fastest across rural and urban
segments. As per Nielsen, the FMCG market size of
middle India is set to expand rapidly over the next two
decades. Rural India, where 70% of the population
resides, presents the biggest market potential for the
industry. Backed by low unit packs and aggressive
distribution reach, rural market size is expected to
expand in the future.

Consumer goods are retailed through two primary sales

channels - General Trade and Modern Trade. General
trade comprising of the ubiquitous kirana stores is the
largest sales channel forming 95% of overall retail
sales. However, growth of consumer goods retailed
through modern trade channel is outpacing the growth
of FMCG products in general trade. Factors such as a
comfortable and modern store experience, access to a
wide variety of categories and brands under a single
roof and compelling value-for-money deals are
attracting consumers to organised retail in a big way.
But modern trade is still an urban phenomenon in India.
Product categories such as packaged rice, liquid toilet
soaps, floor cleaners, breakfast cereals, air fresheners
and mosquito repellent equipment have a higher
penetration in modern trade channel. Modern trade is
expected to gain greater importance with opening up of
foreign direct investment in multi-brand retail.

The implementation of the Goods and Services Tax

(GST) is expected to benefit the sector immensely by
reducing the overall incidence of taxation. GST aims to
reduce the cascading effect by replacing a multitude of
indirect taxes such as central excise, service tax, VAT
and inter-state sales tax with a single GST rate.
Moreover, FMCG companies will be able to optimize
logistics and distribution costs in the GST era. The
resulting cost savings by the companies can be passed
on to the final consumer thereby boosting demand.
However, the implementation of GST has currently
been put on the backburner by the government.

Key Points

Abundant supply through a distribution network of over 8 m stores across the

country. Distribution networks are being beefed up to penetrate the rural areas.


Being items of daily consumption, demand is least impacted by economic

Barriers to entry:

Huge investments in setting up distribution networks and promoting brands and

competition from established companies.

Bargaining power Inputs being mostly agri-commodities, the suppliers are numerous and lack
of suppliers:
scale to wield bargaining power. Companies like ITC that are integrated
backwards have lower dependence on suppliers.
Bargaining power Customer does not have bargaining power in case of branded products but
of customers:
intense competition within the FMCG companies results in value for money
deals for consumers (e.g. buy one, get one free concept).

Competition is faced from domestic unorganized players and established

MNCs. Price wars are a common phenomenon. Private labels offered by
retailers at a discount to mainframe brands act as competition to
undifferentiated and weak brands.

Financial Year 2013 -14

In 2013, the FMCG industry was hit by slowdown in offtake. The overall growth of the industry

halved to 9.4% during the year on the back of a mere one percent volume growth (Source:
Nielsen). The industry had clocked a 9% growth in offtake in 2012. The slowdown in offtake
during 2013 was more pronounced in non-food discretionary items such as personal care

Most of the FMCG companies have reported double-digit growth in FY14. However, FMCG

behemoth Hindustan Unilever clocked an 8.7% topline growth due to slower growth in the Home
and Personal care segment. Even Maricos sales grew by a measly 1% as the company
demerged its Kaya skincare business during the year. Procter & Gamble posted the fastest
growth of 22% backed by double-digit in both feminine hygiene and healthcare businesses. Dabur
was able to register 15% revenue growth on double-digit volume growth. The growth was aided
by widened distribution network particularly due to Project Double.

A number of FMCG companies like HUL, Dabur and Procter & Gamble Hygiene & Healthcare

benefitted from easing commodity prices and posted increased profitability. Even Marico recorded
high profit margin due to savings in staff costs, ad-spends and other expenses after de-merger of
the skincare business. However, higher ad-spends and other operating expenses clipped margins
of Colgate and Godrej Consumer Products during the year.


The election of a pro-reform government at the centre by a huge mandate has led to improvement

in the overall sentiments in the economy. However, rural India is not likely to witness a boost in
demand as the there has been no major increase in NREGA allocation in Union Budget 2014 and
monsoons have been below normal. Demand revival in urban India will spur the next wave of
growth for FMCG companies. As per a survey by IMRB and Kantar Worldpanel, value added
variants of consumer products are witnessing faster growth than the mass end variants. Demand
drivers such as increasing working population, higher monthly expenditure and growing access to
modern trade and e-commerce will drive the growth of value-added and premium consumer


On the input cost front, the import duty on crude-based derivatives used in soaps and detergents

has been slashed in Union Budget 2014. Even crude prices have fallen below $100 a barrel which
will benefit the industry through savings in raw material and packaging costs.

10.) Energy Sources Sector Analysis Report

Energy value chain has 2 stages - upstream (exploration and production) and downstream (refining
and marketing). Post extraction from reserves, crude oil is processed to yield various petroleum
products, which are then marketed.

The gas consuming sectors can be broadly classified into

Priority (power, fertilizers) and unregulated sectors
(industrials, refining etc). The gas demand in India is met
through either domestic supplies or imported gas (LNG).
There are broadly two pricing regimes for the gas in
country - Administered Pricing Mechanism (APM) and
non-APM, which applies to imported gas (LNG) and gas
produced from JV fields. The domestic gas price has been
recently revised from US$ 4.2 per mmbtu (million British
thermal units) to US$ 5.6 per mmbtu.

There are presently three major pipeline entities in gas

transportation in the country - GAIL (operating HVJ and
DVPL), RGTIL and GSPCL. The natural gas is sourced
from KG-D6, Mumbai offshore, Cambay Basin, Ravva
Offshore, KG Basin, Cauvery basin and imported LNG.

As per the Government mandate, the priority sector has

the first claim over domestic gas which is less costly than
the imported.

While petroleum had been officially deregulated in June

2010, the Government has recently announced
deregulation for diesel. However, kerosene and LPG are
still regulated.

Key Points
In the upstream segment, supply from the domestic market caters to 20%-25% of
the total demand for crude oil. In the gas segment also, with the domestic gas
supplies on a decline, the share of imports in gas sector is rising. In the
downstream segment, refining has seen significant capacity addition in the recent
In the past, we have seen a fair degree of correlation between the growth in
petroleum products and the growth in the overall economic activities. Thus

demand will be in line with economic growth.

Barriers to

power of

power of

In the upstream segment, government permission is required to commence

operation. Finding, exploration, development and production cost of oil fields are
significant, thus barriers are higher.

Crude prices are globally determined and are highly susceptible to geopolitical
events, economic growth and demand factors, economic policies, and speculative
bets. Since domestic availability is only about 20%-25% of the requirement, India
is basically a price taker as far as crude is concerned. For the petroleum
products, given the surplus capacity in the country the bargaining power is low.
While OPEC is the cartel that had a major influence on oil prices, with shale
revolution and increasing oil production in US, OPEC's supremacy has been

Now that the petrol and diesel are deregulated, there is likely to be competition in
the fuel retailing space giving more bargaining power to consumers.

The Government of India (GoI) has enacted various policies such as new
exploration licensing policy [NELP] and coal bed methane [CBM] policy to
encourage investments and competition across the industry's value chain.
However, the dominance of ONGC in the segment will continue for some time to
come. In the downstream segment, increased action is expected in product
pipelines and city gas distribution. With new reforms announced in energy sector,
more players are likely to enter oil and gas sector thus increasing the competition.

Financial Year '14

Crude oil production in India stood at 37.8 MMT in FY14 while consumption and production of
Petroleum Products was at 158.2 MMT and 220.2 MMT. The crude oil imports for the year
amounted to US$ 142.9 bn while Petroleum Products imports amounted to US$ 12.3 bn. Total
domestic oil and gas production in FY14 stood at 73.2 MMTOE while overseas production of OVL
(ONGC Videsh Ltd)stood at 8.4 MMT.

Domestic gas production in FY14 stood at 35.5 billion standard cubic metre (bscm) while LNG

imports amounted to 14.3bscm. The length of the pipeline network for natural gas was around
15,340 Km, with GAIL alone accounting for 71% of the network, followed by Reliance and GSPCL
with 10% and 12% share respectively. The natural gas pipeline capacity in FY14 was 395

Installed refinery capacity as on April 2014 stood at 215.1 MMTPA. The crude oil processed in
FY14 stood at 222.4 MMT.

The crude price (Indian basket) in FY14 stood at US$ 105.52 per barrel, down from US$ 107.97

per barrel in FY13. The rupee dollar exchange rate in FY14 stood at Rs 60.5 per dollar, versus Rs
54.45 per dollar in FY13.

For FY14, under recoveries on diesel and kerosene (PDS) stood at Rs 8.4 and Rs 33.98 per litre

while subsidized LPG incurred under recovery loss to the extent of Rs 499.5 per cylinder. The total
under recovery burden in FY14 stood at Rs 1,399 bn. It was shared by Government, Upstream
and oil marketing companies in the ratio of 51%, 48% and 1% respectively.

Under recoveries are highly sensitive to crude prices and exchange rate. The overall borrowings

for OMCs at the end of FY14 stood at Rs 139 bn, almost similar to level in FY13. The Petroleum
subsidy as a % of GDP stood at 1.75%, as compared to 1.7% in FY13.


The oil and gas sector since long has been a victim of regressive policies such as regulated price
regime for Petroleum products. High dependence on imports for crude oil and gas have further
made India's energy sector quite vulnerable. However, over the last two years, some positive
changes have unfolded. Diesel has been deregulated and gas prices have been hiked. Such
developments will promote investment in the upstream and downstream segment. There is likely
to be competition from private players thus challenging market share of state run companies.

As per the estimates for PPAC (Petroleum Planning & Analysis Cell), the demand for petroleum
products and natural gas over the next three years is likely to grow by 5.1% and 8.4%

Because of the increased APM gas allocation and priority of domestic gas to CGD entities , the
CGD consumption is growing because of higher off take.

Going forward, the major focus will be on Exploration and Production. The Government is also

planning to take significant steps in shale gas exploration and optimizing recovery from ageing

With regards to refining, the country is exposed to issues like surplus capacities, competitive
refining margins, stringent product specifications and greater emphasis on cleaner fuels.

The sector is quite vulnerable to global threats like slowdown in the US/ Europe, tensions between

Iran and US region etc. Going forward, higher domestic production, regulatory reforms across the
value chain and pipeline, refining and gas infrastructure will be the driving factors for the sector.

11.) Engineering Sector Analysis Report

Engineering is a diverse industry with various segments. A company from this sector can be a power
equipment manufacturer (like transformers and boilers), execution specialist for Engineering,
Procurement and Construction (EPC) projects or a niche player (e.g.: providing environment friendly

solutions like waste water and air pollution treatment plants). The company can also be an electrical,
non-electrical machinery or static equipment manufacturer too.

Order book size is the biggest determinant of the

company's performance in engineering sector.
The same holds true for construction companies
as well. It indicates companies' revenue visibility.
In order to bag big contracts, companies need to
have a strong balance sheet and proven
execution capabilities. Companies in these
sectors need huge working capital to execute
bigger contracts. In most cases, they receive only
part payment at initial stages and the remaining
comes as projects get executed.

Indian capital goods manufacturers have been

particularly Chinese and Korean manufacturers
since the onset of 11th five year plan. Domestic
power equipment capacities in 2008-2009 were
unable to fulfill the burgeoning demand for power
plants in the country. Therefore, import duties
were relaxed in order to attract foreign suppliers to
India. Currently, despite increased domestic
capacities, low cost foreign manufacturers still
give tough competition to domestic manufactures.

Power sector contributes almost 70-75% to the

government plans to add large-scale generation
as well as transmission and distribution (T&D)
capacities in view of the paucity of power in the
country. Thus, there is enormous potential for the
engineering majors in both generation and T&D

Given the lack of quality infrastructure in India, the

construction industry has been witness to a strong
growth wave powered by large spends on
housing, road, ports, water supply, rail transport
and airport development over the long term. The
sector's growth has however remained subdued
over the past few years - especially when
compared to the pre-2008 period. A big reason for
this is the stalling of various big ticket projects in
the recent past due to myriad reasons.
Infrastructure is also a key area of operation for
major Indian engineering companies.

Key Points
Supply is abundant across most of the segments, except for technology intensive
executions. However, supply of equipments face bottlenecks such as logistics

and lack of manpower for timely assembly and erection of equipments; etc.
Demand growth in this sector is fuelled by expenditure in core sectors such as
power, railways, infrastructure development, private sector investments and the
speed at which the projects are implemented. The pace of project execution has
been lumpy in the year gone by due to delays in execution and cash crunch on
the part of clients.
Barriers to entry
Barriers to entry are high at upper end of the industry as skilled manpower and
technologies as well as ability to execute large projects are a prerequisite in
engineering sector. However, in few construction businesses like road business,
which are not very technologically inclined, the company's expertise in execution
is the key differentiator.
power of

power of

Bargaining power of suppliers is low because of intense competition amongst

them. However, in technology driven high-end segments, suppliers have the
upper hand.

Bargaining power for technology driven and highly skilled segments is low.
However, fierce competition has increased bargaining power of customers in
power generation and T&D equipments.

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

Financial Year '14

FY14 was yet another disappointing year for the Indian engineering industry. Order inflows were

weak due to delays in project awards, land acquisition problems and environmental issues. Even
the operating margins came under pressure due to commodity price inflation. Thus, rising
commodity prices and slowdown in order inflows proved to be a double whammy for the
engineering companies.

Due to higher interest rates and lack of availability of funds for infrastructure and other industries;

capex failed to pick up during the year. Also, with inflation continuing to reign high we do not
expect rate cycle to witness sudden massive cuts for the next few quarters. This could further
impact the momentum in industrial capex. However, with the formation of a stable government at
the centre which enjoys a strong majority, the capex cycle may very well pick up sooner rather
than later.

The situation in the construction industry remained subdued in FY14 - given the slowdown in the

overall economy. High levels of inflation led the RBI to keep the interest rates high, thereby
impacting investments. A key issue faced by private players has been financial pressures in terms
of financing coupled with errors in estimation and delays in execution across segments. This has
led to stress in the balance sheets of many of these companies too.


World class infrastructure is of utmost importance for unleashing high and sustained growth. In
fact, it is the long term driver for the construction sector as well. While short term factors may keep
sentiments subdued, over the long term, demand will remain strong. The proposed increase in
doubling investment in infrastructure from Rs 20 trillion to Rs 41 trillion in the twelfth five-year plan
(2012-2017) will translate into a healthy business for construction companies.

From a policy perspective there has been a growing consensus that a private-public partnership is

required to remove difficulties concerning the development of infrastructure in the country. The
realisation finally seems to be setting in with numerous BOT (build, operate and transfer) projects
being awarded to various private sector companies. This makes the future of the Indian
engineering and construction sector promising.

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

industry. As per Government official reports, regulatory delays have stalled projects worth about
Rs 2,000 bn in the road, power, coal and mining sectors alone. The government has been working
on trying to fast track large sized infrastructure projects. It will work to expedite these projects
which have been stalled due to delay in clearances, funding and various other reasons. These
initiatives may help revive the Engineering and Construction sector going forward.

The next couple of years may remain challenging for the engineering and construction companies.

While execution pace is slowing down due to various internal as well as macro issues, margins
have also come under pressure due to rising input cost, competition and over capacity in a few
sub sectors. Thus, unless the macro-environment improves overall growth will continue to remain
sluggish in the near term.

12.) Hotels Sector Analysis Report

Tourism has now become a significant industry in India. As per the World Travel & Tourism
Council, the tourism industry in India is likely to generate US $121.4 bn of economic activity by
2015, and the hospitality sector has the potential to earn US $24 bn in foreign exchange by
2015. The booming tourism industry has had a cascading effect on the hospitality sector with an
increase in the occupancy ratios and average room rates. In FY14, the occupancy ratio was
around 57%, up 1% from last year. The average room rate decreased over the last one year by
about 3.4% due to supply pressures and the general slowdown in the economy. The long term
outlook for the Indian hospitality business continues to be positive, both for the business and
leisure segments with the potential for economic growth, increases in disposable incomes and

the burgeoning middle class.

on advertising campaigns (including
for the
campaigns 'Incredible India' and 'Athithi Devo
Bhava' - Visitors are like God) to reinforce the rich
variety of tourism in India. The new Indian
government has stated that tourism will be a key
focus sector.

As per Cushman & Wakefield (C&W) reports,

hospitality sector of India is expecting to witness
better infrastructure growth. Approximately 4,304
new hotel rooms are expected to open in 2014, of
which 36% for Mid-scale, 13% in the upscale
segment, 17% is expected for Budget segment,
13% in Upper Upscale, and 20% in the Luxury

Key Points
There is a shortage of about 100,000 guest rooms in the country. This is
expected to keep ARRs stable for at least the next few years.
Largely depends on business travelers but tourist traffic is also on the
rise. Demand normally spurts in the peak season between November
and March.
Barriers to entry
High capital costs, poor infrastructure facilities and scarcity of land
especially in metros.
Bargaining power of
Limited due to higher competition, especially in metros.
Bargaining power of
Higher in metros due to increasing room supply.
Intense in metros, slowly picking up in tier-2 and tier-3 cities.
Competition has picked up due to the entry of foreign hotel chains.

Financial Year '14

The international travel and tourism industry continues to show moderate growth and as per
United Nations World Tourism Organisation (UNWTO). International Tourist Arrivals,

worldwide, grew by 5% in 2013 to reach 1.087 bn from 1.035 m in 2012. As per World Travel
and Tourism Council (WTTC) estimates, travel and tourism sectors contribution to the global
economy continued to increase for a fourth consecutive year. Its economic contribution, from
both direct and indirect activities combined, was US $7 trillion in Gross Domestic Product
(GDP) and 266 m jobs. Thus, travel and tourism sector accounts for 9.5% of global GDP, 1 in
11 jobs, about 5% of investment and 5% of exports.

As per WTTC, in India, the total direct and indirect economic impact of the travel and tourism

industry was US$ 128 bn, being 6.7% of the GDP and over 39.4 m jobs. As per statistics
updated by the Indian Ministry of Tourism, the Foreign Tourist Arrivals in India has remained
steady. While there has been a considerable slowdown in the growth rate, it is at par with the
global scenario and can be expected to pick up. Indias export earning earnings from tourism
increased to US$ 21.9 bn in 2013. This was 13% of all exports from the services sector.

In terms of hospitality industrys performance in India, the overall rates, occupancies and

RevPAR (Revenue per room) have been stagnant owing to the impact of increased supply in
the market and the general recessionary environment.

Supply overhang in certain cities, increase in food and fuel costs and rising interest rates
have eroded the margins for the Indian hotel industry over the last few years. The balance
sheets of hotel companies remained under stress in FY14 on account of acquisitions of land
banks at unrealistically high prices in the past and the resultant rise in debt levels.



In the long term, the demand-supply gap in India is very real and that there is need for more
hotels in most cities. The shortage is especially true within the budget and the mid market
segment. There is an urgent need for budget and mid market hotels in the country as
travellers look for safe and affordable accommodation. Various domestic and international
brands have made significant inroads into this space and more are expected to follow as the
potential for this segment of hotels becomes more obvious.

The United Nations World Tourism Organisation (UNWTO) expects growth to continue in
2014 at 4%, in line with UNWTO long term forecast. While Asia Pacific and America will lead
the growth, Europe and Middle East are expected to remain under pressure. As per WTTC,
the travel and tourism sector in India is forecasted to grow at a rate of 7.9% over the next
decade. While key source markets of America and Europe are expected to continue to be the
largest contributors to tourism, domestic short haul travel across Asia Pacific will remain a
growing trend, with Asia Pacific being a key growth driver for outbound tourism.

The depreciation of the Indian rupee against the dollar is of great concern to almost every
industrial and service sector in the Indian economy. However, India's current economic woes
are good news for tourists. Whether it is foreign traveler arrivals or domestic tourism, India's
tourism industry is experiencing a real boom. The rising value of the dollar against the rupee
has made quite an impact on the foreign travel plans of many Indian holidaymakers,
prompting them to switch to cheaper destinations to make their depreciated currency go
further. As a result, domestic destinations like Goa and Agra are witnessing increasing
interest. Anticipating an inbound travel upswing during the winter season, tourism
stakeholders nationwide are excited about the prospects of a robust tourism revival.

Safety and security issues must be understood with the context of tourism. In addition, safety
has become a more prominent concern for tourists. Concerns about womens safety remains

of paramount importance. Safety and security are vital to providing high quality tourism.
Hence, to promote tourism there should be sound law and order to assure tourists that they
are safe.

13.) Media Sector Analysis Report

Indian media and entertainment industry is expected to grow at an annual average growth rate of
18% to touch Rs 2245 bn by 2017 (Source: CII-PwC 2013 report). The industry comprises of print,
electronic, radio, internet and outdoor segments. With the government aggressively pushing in for
digitization of TV, Multi System Cable Operators (MSOs) are expected to lose 15-20% of their
subscribers to DTH (direct-to-home) services. Digitization will facilitate increased number of channels
and high quality viewing. The Information and Broadcasting (I&B) ministry has already completed the
second phase of digitization, which involved digitizing 16m cable TV houses in 38 cities during FY14.
The growth trend for subscription revenues largely depends on the roll out of the Phase III and IV of
digitization. The timely roll out of these phases is poised to substantially benefit the industry.

The players in the electronic media can be

classified into a three-link chain. First are the
studios (including the animation studios), which
comprise the hardware part of the industry, the
second are the content providers and the third
link comprises the distribution trolleys, which
include the cable and satellite channels, multiplex
theatres, MSOs and the DTH players.

In India, the ratio of advertising expenditure to

GDP is less than 1%. This is substantially lower in
comparison to the developed economies as well
as other developing economies. Interestingly,
Print and TV media contribute over 75% of the
advertisement spend in a year. As the Indian
economy continues to develop and the media
reach increases, the advertising expenditure to
GDP ratio is expected to increase over the next 5

Key Points
Of the more than 70,000 newspapers printed in India, around 90% are published
in Hindi and other vernacular languages. There are a total of 833 private satellite
TV channels, permitted by the Information and Broadcasting Ministry, out of
which 163 are pay channels.
The demand for regional print media is growing at a faster pace than that of
English language print media. In the electronic media, the highly fragmented
viewership has led to an increasing preference for niche channels.

Barriers to

power of

power of

In the electronic media, entry barriers are high for broadcasting since it is very
capital-intensive. It involves the cost of leasing the transponder, setting up uplinking facilities, setting up pre and post-production facilities. The barriers to entry
are far lower for content providers. Besides, broadcasters themselves
commission programmes and finance their production. Hence margins are lower.
In spite of the high barriers to entry a slew of channels across languages and
genres have been launched in the recent past.

In the print media, it is high for newsprint suppliers. It is medium to low for content
providers in the electronic media. Terrestrial broadcasters such as Doordarshan
and regional broadcasters such as Sun TV actually commission time slots to
content providers.

Relatively high in both print and electronic media. The consumer finds a surfeit of
players to choose from. Conditional access system (CAS) and DTH services now
enable the consumer to choose the channels that he wishes to view; thereby
increasing his bargaining power.

High in print media, especially in Hindi dailies. The print sector includes listed
entities like Jagran Prakashan and HT Media. Regional print media too is seeing
increasing competition. Competition is high amongst broadcasters especially for
general entertainment channels. The space includes listed entities like Zee TV,
TV 18, UTV, NDTV and Sun TV.

Financial Year '14

FY14 proved to be yet another tough year for the media industry. The delay in pick up in economic
activity continued to impact advertisement spends. This impacted revenues of media companies
as they derive a substantial chunk of their revenues from this segment.

In the print space, efforts are being seen towards consolidation of business rather than aggressive
expansions. The fall of rupee and its volatility during the year hurt the bottom line of the print
media companies as the cost of imported newsprint went up.

The electronic media industry did mature to a considerable extent in FY14, especially after the
roll-out of digitization Phase I and II during the year. The growth trend for subscription revenues
largely depends on the roll out of the Phase III and IV of digitization. The timely roll out of these
phases will certainly benefit the industry. Digitization deadline was further postponed on low
availability of set top boxes. Phase III is expected to be completed in 2015 and Phase IV has to be
finished in 2016.



The fortunes of the media industry are linked to the growth of the economy. India is set to grow at
a rate of at least 6-7% over the long term. Rising incomes in the hands of people encourage them
to spend more on discretionary items like media and entertainment. However, the trend is shifting
more towards the online medium.

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

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

New distribution technologies like DTH, Conditional Access System (CAS) and IPTV, hold the

future of the media industry as increasing digitization will radically alter the ways in which
consumers receive channels. The mandatory digitization all over India will bring in more
subscription revenues for the broadcasters as opposed to under reporting of numbers by cable
operators at present. Also, continued growth of regional media and growing strength of the filmed
entertainment sector will also boost growth of the media industry.

The advent of digital platforms will require industry participants to invest in constant innovation in
products and services. Thus, going forward, innovation will be the key to attract more consumers
and deliver relevant content and services that are profitable too.

With metros already being saturated, regional markets provide ample scope for growth in the

media sector. In print media, newspapers are being published in vernacular language. In
television, newer channels are introduced in local languages. Tier II and Tier III cities and towns
are set to drive the Indian consumption story in the next few years. Television will continue to lead
the media industry in terms of revenue contribution with 39%, followed by internet access with 28
%. While, the share of print and films are likely to decrease to 15% and 9% in 2017.

14.) Paints Sector Analysis Report

The paint industry is expected to grow at 12-13% annually over the next five years from Rs 280 bn in
FY13 to around Rs 500 bn by FY18. FY14 was a challenging year for the industry as a whole due to
subdued demand across key sectors and rising inflation.

The unorganised sector controls around 35% of the paint

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

Demand for paints comes from two broad categories:

Decoratives: Major segments in decoratives include
exterior wall paints, interior wall paints, wood finishes and
enamel and ancillary products such as primers, putties etc.
Decorative paints account for over 77% of the overall paint
market in India. Asian Paints is the market leader in this

segment. Demand for decorative paints arises from

household painting, architectural and other display
purposes. Demand in the festive season (SeptemberDecember) is significant, as compared to other periods.
This segment is price sensitive and is a higher margin
business as compared to industrial segment.
Industrial: Three main segments of the industrial sector
include automotive coatings, powder coatings and
protective coatings. Kansai Nerolac is the market leader in
this segment. User industries for industrial paints include
automobiles engineering and consumer durables. The
industrial paints segment is far more technology intensive
than the decorative segment.

The paints sector is raw material intensive, with over 300

raw materials (50% petro-based derivatives) involved in
the manufacturing process. Since most of the raw
materials are petroleum based, the industry benefits from
softening crude prices.

Key Points
Supply exceeds demand in both the decorative as well as the industrial paints
segments. Industry is fragmented.
Demand for decorative paints depends on the housing sector and good
monsoons. Industrial paint demand is linked to user industries like auto,
engineering and consumer durables.
Barriers to entry
Brand, distribution network, working capital efficiency and technology play a
crucial role.
Bargaining power
of suppliers
Price increase constrained with the presence of the unorganised sector for the
decorative segment. Sophisticated buyers of industrial paints also limit the
bargaining power of suppliers. It is therefore that margins are better in the
decorative segment.
Bargaining power
of customers
High due to availability of wide choice.
In both categories, companies in the organised sector focus on brand building.
Higher pricing through product differentiation is also followed as a competitive

Financial Year '14

FY14 was tough for the Indian paint sector. Hopes of a revival in demand after a good monsoon

and during the festive season were dashed by high inflation. The demand for paint, being a
discretionary expenditure, is typically hurt during periods of rising inflation. However, to their
surprise, paint makers have found that while demand remained tepid in cities, consumption was
rising in rural areas. The increasing reach of media in villages has also helped paint makers,
making easier for them to advertise their products in these regions. Companies have also
discovered that demand for premium paints is high even in remote locations.

Performance on the margins was impacted by the rising prices of crude oil and titanium dioxide

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

However, a good monsoon this year is expected to boost demand in the rural areas. A good
harvest and festival season demand can boost volumes in the second half of FY15.

All the key players are in an expansion phase. Asian Paints plant in Khandala, Maharashtra has

recently got comissioned. Kansai Nerolacs capacity expansion plans at Jainpur and Bawal has
culminated. Berger Paints has also undertaken capacity expansion for its plants located in Andhra
Pradesh (AP). Further, expansion of water based plant at Rishra and Goa is also on track. As per
estimates, paint capacities are expected to go up by 50-70% in the coming 3 to 5 years.


The market for paints in India is expected to grow at 1.5 times to 2 times GDP in the next five
years. With GDP growth expected to be between 5-6% levels, the top three players are likely to
clock above industry growth rates in the future, considering they have a strong brand and good

The market size of the paint industry in India is estimated at around Rs 290 bn. Industry players
expect close to 12% growth in business volume and 10-12% rise in sales in FY15.

Decorative paints segment is expected to witness higher growth going forward. The fiscal
incentives given by the government to the housing sector have immensely benefited the housing
sector. This will benefit key players in the long term.

Although the demand for industrial paints is lukewarm it is expected to increase going forward.

This is on account of increasing investments in infrastructure. Domestic and global auto majors
have long term plans for the Indian market, which augur well for automotive paint manufacturers
like Kansai Nerolac and Asian-PPG. Increased industrial paint demand, especially powder
coatings and high performance coatings will also propel topline growth of paint majors in the
medium term.

If the new capacities do not get utilized well, companies may face margin pressures in the near

15.) Petrochemicals Sector Analysis Report

Petrochemicals are the derivatives of crude oil and natural gas. Olefins (ethylene, propylene &
butadiene) and Aromatics (benzene, toluene & xylenes) are the major building blocks from which
most Chemicals and Petrochemicals are produced. They are used in dyes, synthetic fibres, rubbers,
plastics, pharmaceutical bulk drugs, industrial appliances, packaging industry, detergents

Petrochemicals production process consists of

primarily two stages. In the first stage naphtha,
produced by refining, crude oil or natural gas is
used as a feedstock and is cracked. Cracking
(breaking of long chain of hydrocarbon molecule)
produces olefins and aromatics. In stage two,
these building blocks are polymerized (made to
undergo chemical processes) to produce
downstream petrochemical products (polymers,
polyesters, fibre intermediaries and other industrial
chemicals. The upstream integrated naphtha / gas
cracker complexes are technology intensive and
enjoy economy of scales. However, downstream
plastic processing industry is quite fragmented
across the country and operates at lower than
optimum capacity. Some of the key players in this
industry are Reliance Industries Ltd (RIL), Gas
Authority of India Ltd (GAIL), and Indian Oil
Corporation Ltd (IOCL) etc.

Olefins are the key building blocks of the

petrochemical industry. Of the main, while India
has sufficient capacities for ethylene and
propylene, styrene continues to be in deficit.
Ethylene capacity grew in the five year plan due to
partial de bottlenecking of capacity by
GAIL, HPCL and the start-up of IOC complex at
Panipat. Propylene production boosted due to
extraction of Propylene by RIL at its Refinery
Complex. For Butadiene, RIL and Haldia are the
only two domestic producers.

The industry suffers from high capital and energy

costs, shortage of natural gas, lack of skilled
manpower, low focus on value added exports of
end products, cyclical nature of business, zero
import duty differentials between polymers and


The key demand drivers of this industry are GDP

growth, improvement in disposable income,
aspirations of young India, urbanization, etc.
These megatrends get translated to increase
demand for healthcare, packaging, white goods,
automobiles, agri produce, retail, etc. The margins
in the industry are cyclical and typically follow a 68 year period of troughs and peaks.

The prices of petchem are determined on the

basis of South East Asia (SEA) prices plus import
duties. Due to relatively free imports and end
prices being market driven, the domestic
producers have to price their products in line with
the prices prevailing in SEA region, irrespective of
costs of production that leads to different margins
for producers having different feedstocks.

Important aspects of Petchem plant include

Capital financing and feedstock tie-up.

Availability and high duty on feedstock (natural

gas), high cyclicality in the business, low import
duties on polymers, poor margins due to nil duty
differential between feed-stock and Products,
large capex needed to set petchem projects
(Petchem feedstocks face 5%customs duty) are
some of the issues that the industry faces.

Key Points
So far India has worked towards self sufficiency in petrochemicals, which has
been achieved.

Demand of the petrochemicals generate from the downstream industries, which in
turn are dependent on the state and growth of the economy which is facing a

Barriers to

The petrochemical industry is capital-intensive by nature. The minimum economic

size of an integrated plant is around 1 million tonnes per annum, which in turn
calls for huge investments.

power of

power of

Moderate to low despite the surplus naphtha production in the country. This is
due to the fact that the suppliers are concentrated. However, with more and more
integration happening for the oil refining companies, it should improve.

Moderate to low, the downstream user industry is fragmented, which reduces

their collective bargaining power. Import duties on the products have declined
significantly over the past and with additional capacities coming up in the Middle
East the bargaining power of the customers might improve to an extent.

Competition within the domestic market is limited, as there are only a handful of
players with world-class capacities. However, due to low import duties, there is
threat of imports from Middle East and the Asia Pacific region. Also, the refineries
are getting integrated, which will reduce the industry concentration in terms of
market share and in turn fuel competition. While India has opportunities to benefit
from high labour costs in the developed economies, it faces a threat from GCC
(gulf countries) countries that enjoy heavily subsidized feedstock that has also led
to capacity expansions mainly for exports.


Financial Year '12

FY12 was marked by high feedstock prices and oversupply from Middle East. India remained a
net importer of polymer products.

The year witnessed the recovery of global markets from the oversupply of ethylene from Middle

East and Asia. The global demand remained slow due to European crisis and stagnant Chinese
demand. The global ethylene capacity grew by 3.6 MMT, while supply grew by 3.4 MMT. Global
ethylene production totaled 125.6 MMT during the year (operating rate of 85.2% as compared to
84.9% in the previous year). Global ethylene prices were high due to higher crude oil and naphtha
prices .However, Asian ethylene margins were under pressure as polyethylene prices did not
increase in line with naphtha costs. During the year, 90% of capacity additions were from Middle
East and Asia. Capacitywise, Middle East has a share of 18% while Asias share stands at 33%.

In polymer segment, the consumption of global commodity plastics in FY 2011-12 was estimated
at 205 MMT. The product price recovery of 4% to 10% was slower than the inflation of feedstock

The PVC consumption is India for FY12 is estimated to be 1.99 MMT, up 3%YoY. India imported

about 747 KT (73 KT higher than FY 2010-11) of PVC. Pipes and fittings continued to be the major
market accounting for 73% of the domestic PVC demand

A total of 3.3 MMTA capacities were built for building blocks during the 11th plan period. (Actual

production normally improves gradually). These additions, as mentioned earlier were by RIL,

GAIL, and IOCL by way of new plants, or debottlenecking.

During the 11th plan period (2007-12), the demand for olefins grew by 14% YoY. Partial
debottlenecking by GAIL, start up of IOCL plants and propylene extraction by RIL increased
building blocks production during the 11th plan period (achieved 8.7% CAGR)

During FY06 to FY11 demand for synthetic rubber grew at an annual rate of 11.5% while the
demand for natural rubber grew at CAGR of 3.4% and overall demand of rubber registered CAGR
of 5.5% in the country.

The current PTA capacity is 3850 KT and is projected to grow to 7130 KT by 2014-15. The

demand has shown a consistent growth of 8-10% and future growth projections are 12-13% driven
by downstream investments in Polyester capacities.

Indian textile industry has been growing @ 11% per annum during the last five years. Maintaining
this growth rate, the Indian textile industry is likely to reach a US$ 220 bn size by 2020.


Current scenario and prospects

Over the next 5 years, around 24.6 MMT are likely to be added to global ethylene capacity. More

than 90% of the capacity expansions in PP and PE are likely to happen in Asia and Middle East.
Around 82% of incremental capacity of PVC is expected to come up in Asia and the Middle East in
the next five years.

Among the domestic players, GAIL will be doubling up its petchem facility at PATA to produce 9

lac tonnes per annum (TPA) of polymers. It is also setting up a 2.8 lac TPA complex in Assam
through ots subsidiary. Besides, GAIL will be a copromotor in OPAL (ONGC Petroadditions Ltd.)
which is implementing a greenfield Petrochem complex of 1.4 TPA polymer capacity at Dahej,
Gujarat. Mangalore Refinery (MRPL), a subsidiary of ONGC, has announced a new aromatics
complex at Mangalore. The aromatics complex is expected to produce 275 KTA of benzene.
Completion is delayed, and the start up is now expected in early 2013.

By the end of the 12th Five year Plan, the demand for plastic processing machinery is projected to
increase annually by 10.5% to 10,800 machine/ year with installed capacity of 50 MMTA.

In 12th five year plan, overall capacity growth of 6.8% CAGR will be lower than demand growth of

10%. During 12th plan period new capacities are being planned and requirement of building
blocks will go up from 6.4 MMT to 13.5 MMT(current capacity of 8.5 MMTA). IOCL and OPAL are
adding butadiene capacities. RIL, ESSAR and OPAL are adding ethylene and propylene.
Requirement of styrene will be met through imports only in 12th plan also as no new capacities
are planned.

As a result of under-developed trade and logistics infrastructure, the logistics cost of the Indian

economy is over 13% of GDP, much higher than the cost in developed countries (less than 10%).
Infrastructure in Petroleum, Chemicals and Petrochemical Investment Regions (PCPIR) will be
critical in enhancing competitiveness of industry to be able to produce and distribute goods both
for the domestic market and for exports.

16.) Pharmaceuticals Sector Analysis Report

The Indian Pharmaceutical market (IPM) is highly fragmented with about 24,000 players (330 in the
organised sector). The top ten companies make up for more than a third of the market. The market is
dominated majorly by branded generics which constitutes of nearly 70% to 80% of market.

The IPM is valued at Rs 750 bn for the year ending

March 2014.The growth in 2014 was subdued at 6%
YoY vs 12% in 2013. The growth was impacted as the
drug price control order (DPCO) issued notice to bring
348 drugs under price control. Despite this, the Indian
pharma market remains one of the fastest growing
pharma markets in the world. Currently the IPM is third
largest in terms of volume and thirteen largest in terms
of value.

Besides the domestic market, Indian pharma

companies also have a large chunk of their revenues
coming from exports. While some are focusing on the
generics market in the US, Europe and semi-regulated
markets, others are focusing on custom manufacturing
for innovator companies. Biopharmaceuticals is also
increasingly becoming an area of interest given the
complexity in manufacture and limited competition.

Introduction of GDUFA (Generic drug User Fee Act) in

the US during July 2012 too had a negative impact on
pharma companies. As per this Act, the generic
companies are required to pay user fees to USFDA, for
application of drugs and manufacturing facilities. This
fee will be utilized by USFDA to engage additional
resources in order to speed up the approval process.
While the drug filling fees was applicable since some
time, from Oct 2014 even plant inspection fees has
come into effect.

As the patent cliff is approaching, Indian pharma

companies have increased their R&D expenses. The
companies are spending more to establish niche
product portfolios for the future.

Consolidation has increasingly become an important

feature of IPM. The recent deals viz; Sun pharma
acquiring Ranbaxy, Wyeth and Pfizer merger, Strides
selling its injectables arm and so on are the classic

Key Points

Higher for traditional therapeutic segments, this is typical of a developing
market. Relatively lower for lifestyle segment.
Very high for certain therapeutic segments. Will change as life expectancy,
literacy increases.
Barriers to entry
Licensing, distribution network, patents, plant approval by regulatory authority.
Bargaining power
of suppliers

Bargaining power
of buyers

Distributors are increasingly pushing generic products in a bid to earn higher


High, a fragmented industry has ensured that there is widespread competition

in almost all product segments. Currently, the domestic market is also
protected by the DPCO.

High. Very fragmented industry with the top 300 (of 24,000 manufacturing
units) players accounting for large chunk of sales. Top 20 companies account
for 60% of the IPM sales.

Financial Year '14

FY14/CY13 was challenging on the domestic front. The companies witnessed sluggish growth on

the back of pricing policy. The companies faced strikes from the wholesales on margin issues due
to reduction in prices of overall drugs.

MNC pharma companies continued to witness subdued growth during FY14/CY13. It is important
to note, the growth of the MNC players was below the domestic pharma companies. The pricing
policy had a negative impact on the company's revenues. Over and above, these companies were
also impacted by the increasing competition, drug launches by other companies before patent
expiry, through compulsory licensing and patent infringements. Only couple of companies
exhibited better growth. The margins of these companies remained subdued due to increasing
expenses and slower top line growth.

In the US, generic companies witnessed mixed growth. While some of the companies benefited

from the low competition launches, others got impacted due to delay in approvals. Though there
were not many blockbuster launches during the year, various companies did manage to display
better growth. On the other hand, the companies witnessed growth pressures in several regions of
Europe, Latin America and some other geographies due to increasing efforts by governments to
reduce their healthcare burden and delay in approvals.

Rupee depreciation was one important aspect which helped the industry especially those
companies who had not hedged their receivables.

The industry continued to face challenges on the regulatory front. During the year, there were few

Indian companies that faced issues from the USFDA, as they lacked good manufacturing
practices (GMP). Because of this, there were instances of import alerts being issued, drug recalls,
warning letters and so on. The regulators have become more stringent now and have also been
conducting surprise checks.


The IPM size is expected to grow to US$ 85 bn by 2020. The growth in Indian domestic market

will be boosted by increasing consumer spending, rapid urbanization, increasing healthcare

insurance and so on.

The life style segments such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers

will continue to be lucrative and fast growing owing to increased urbanisation and change in
lifestyle patterns. Going forward, better growth in domestic sales will depend on the ability of
companies to align their product portfolio towards these chronic therapies as these diseases are
on the rise.

In various global markets, the government has been taking several cost effective measures in

order to bring down healthcare expenses. Thus, governments are focusing on speedy introduction
of generic drugs into the market. This too will benefit Indian pharma companies. However, despite
this huge promise, intense competition and consequent price erosion would continue to remain a
cause for concern. Over and above this, following GMP will be an important criteria for companies
in order to grow in the global markets.

For the US market, Indian companies are developing niche portfolios in various segments. High

margin injectables, dermatology, respiratory, biogenerics, complex generics etc. have become an
area of interest. Most of the Indian pharma companies have been working on these niche drugs in
order to optimize growth and margins. Thus, post patent cliff, the companies which have
developed their product basket in the niche category will be ahead in the curve. Moreover, generic
penetration in the US is expected to peak out at 86-87% over the next couple of years from 83%

17.) Power Sector Analysis Report

Coal shortages, scams, hike in prices of imported coal, lack of land availability, shortage in supply of
equipments for new capacities and policy logjam have together paralyzed the prospects of power
sector in India in the recent past. So much so that the sector that cornered a bulk of the five-year
plan infrastructure outlays for decades, is now a forbidden one. Not just for investors but even for
bankers and financers that a sector like power heavily relies upon.

The key problems hindering the growth of the

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

planned owing to abundance of fuel resources.

Central institutions like National Thermal Power

Corporation Limited (NTPC) and the State
Electricity Boards (SEBs) continue to dominate the
power sector in India. India has adopted a blend of
thermal, hydel and nuclear sources with a view to
increasing the availability of electricity. Thermal
plants at present account for 68% of the total
power generation capacity in India. This is followed
by hydro-electricity (28% share). The rest comes
from nuclear and wind energy.

Average transmission and distribution losses

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

Losses of Indias State Electricity Boards have

once again assumed disproportionate levels, thus
coming full circle since the Electricity Act of 2003
which tried to make these entities more efficient.
The average cost of supply for most discoms has
far exceeded the average revenue realized.

Key Points
Many projects have been planned but due to slow regulatory processes and
inadequate equipments and fuel, the supply is far lesser than demand. As per
certain estimates, India needs to double its generation capacity over the next
decade or so to meet the potential demand.
The long-term average demand growth rate is expected to remain in the higher
single digit growth levels given the lower per capita power consumption in india
as compared to the global average.
Barriers to entry
Barriers to entry are high, especially in the transmission and distribution
segments, which are largely state monopolies. Also, entering the power
generation business requires heavy investment initially. The other barriers are
fuel linkages, payment guarantees from state governments that buy power and
retail distribution license.

of Not very high since the tariff structure is mainly regulated.


of Bargaining power of retail customers is low, as power is in short supply. However

government is a big buyer and payments from it can be erratic, as has been seen
in the past.

Getting intense, but despite there being enough room for many players, shortage
of inputs such as coal and natural gas has dissuaded new entrants.

Financial Year '13

While average PLFs declined for all thermal power generation utilities across sectors, the Central

Public Sector Undertakings continued to be the best performers, followed by private sector. SEBs
and IPPs were the worst performers during FY13. Key reasons for the declining PLFs were
shortage and poor quality of coal coupled with backing down of units and shutting down of units
due to low demand from beneficiary states as well as delays in stabilisation of new plants.

Energy deficit (difference between requirement and availability) numbers worsened during the
year with the same standing at 8.7% (8.5% in FY12). Peak deficit numbers however improved on
a year on year basis.

As far as T&D segments of the sector are concerned, there was little that actually happened in
FY13. The country continues to reel under the pressure of higher T&D losses (about 26%) and
with the government going very slow with the reforms process in these segments, due to which the
long-term sustainable growth of the sector seems doubtful.

After the massive grid collapse in August in 2012, the problems of the transmission segment have

resurfaced to governments attention. Investments in this segment have, however, moved rather
slowly. The existing inter-regional power transfer capacity stood at 27,750 MW at the end of the
11th Plan period. The same is targeted to increase to 65,550 MW by the end of the 12th Plan. The
challenges that need to be addressed to meet this plan include right of way, flexibility in line
loading and improvement of operational efficiency, amongst others.

In order to ensure adequate supplies of coal and avoid stranded generating capacities in the

country, the government issued a Presidential directive to CIL to sign Fuel Supply Agreements
(FSAs) with power producers assuring them of at least 80% of the Annual Committed Quantity.
However, CIL was unable to honour the 80% commitment on account of production shortfall.



Recognising that electricity is one of the key drivers for rapid economic growth and poverty

alleviation, the industry has set itself the target of providing access to all households over the next
few years. As per government reports, about one third of the households do not have access to
electricity. Hence, meeting the target of providing universal access is a daunting task requiring
significant addition to generation capacity and expansion of the transmission and distribution

The target for power capacity addition during the 12th Plan period is 88,000 Mw. With about
60,000 Mw under execution, this 88 Gw should be achieved after hitting 55 Gw in the 11th Plan.

The country added nearly 20 GW in FY13 - the first year of the plan. However, a significant
amount of capacity is stranded owing to the non-availability of gas. Rising demand and falling
domestic production has pushed the share of imported gas to 40% of the current consumption in
India. The US has turned into a net energy exporter on the back of huge quantities of shale gas
and oil becoming available commercially.

Import of coal in India is expected to rise up to 200 MMT (m metric tonnes) in the terminal year of
the 12th Plan as availability of coal from domestic linkages would not suffice the requirements.

Restoration of the financial health of state electricity boards (SEBs) and improvement in their

operating performance continue to remain a critical issue for the sector. As such, effective
implementation of the restructuring package remains the key. While the power distribution has
been loss-making business in India on an overall basis, the investments in T&D are expected to
improve with the privatization coming in.

18.) Retailing Sector Analysis Report

India is the 5th largest retail market in the world. The country ranks fourth among the surveyed 30
countries in terms of global retail development. The current market size of Indian retail industry is
about US$ 520 bn (Source: IBEF). Retail growth of 14% to 15% per year is expected through 2015.
By 2018, the Indian retail sector is likely to grow at a CAGR of 13% to reach a size of US$ 950 bn.
Retailing has played a major role the world over in increasing productivity across a wide range of
consumer goods and services. In the developed countries, the organised retail industry accounts for
almost 80% of the total retail trade. In contrast, in India organised retail trade accounts for merely 810% of the total retail trade. This highlights a lot of scope for further penetration of organized retail in

The sector can be broadly divided into two

segments: Value retailing, which is typically a low
margin-high volume business (primarily food and
groceries) and Lifestyle retailing, a high marginlow volume business (apparel, footwear, etc). The
sector is further divided into various categories,
depending on the types of products offered. Food
dominates market consumption with 60% share
followed by fashion. The relatively low
contribution of other categories indicates
opportunity for organised retail growth in these
segments, especially with India being one of the
world's youngest markets.

Transition from traditional retail to organised retail

is taking place due to changing consumer
expectations, growing middle class, higher
disposable income, preference for luxury goods,
and change in the demographic mix, etc. The
convenience of shopping with multiplicity of
choice under one roof (Shop-in-Shop), and the
increase of mall culture etc. are factors
appreciated by the new generation. These factors
are expected to drive organized retail growth in

India over the long run.

Key Points
Players are now moving to Tier II and Tier III cities to increase penetration and
explore untapped markets as Tier I cities have been explored enough and have
reached a saturation level.
Healthy economic growth, changing demographic profile, increasing disposable
incomes, changing consumer tastes and preferences are some of the key factors
that are driving and will continue to drive growth in the organised retail market in
Barriers to

power of

power of

Reforms by India in opening up its economy have greatly improved trade

prospects, but major barriers still exist such as regulatory issues, supply chain
complexities, inefficient infrastructure, and automatic approval not being allowed
for foreign investment in retail. However, some of these issues may be tackled
with allowance of FDI in single and multi-brand retail.

The bargaining power of suppliers varies depending upon the target segment, the
format followed, and products on offer. The unorganised sector has a dominant
position, still contributing about 90% to the total retail market. There are few
players who enjoy an edge over others on account of being established players
and enjoying brand distinction. Since it is a capital intensive industry, access to
capital also plays an important part for expansion in the space.

High due to wide availability of choice. With FDI coming in, this is expected to
become stronger.

High. Competition is characterised by many factors, including assortment,
products, price, quality, service, location, reputation, credit and availability of retail
space etc. New entrants (business houses and international players) including
foreign players are expected to further intensify the competition.

Financial Year '14

During FY14, the economic backdrop was a key factor impacting the performance of retail

companies across various sub sectors, including that of organized retail. Consumer sentiment and
business confidence continued to be subdued during the year with economic growth decelerating
further. This is attributable mainly to weakening industrial growth in the context of tight monetary
policy followed by the RBI through most of the year, political & policy stability related concerns and

uncertainty in the global economy.

Inflation also was an important concern area. Persistent high inflation and inflation expectations
meant that the RBI was compelled to maintain the benchmark interest rates at a much higher level
than what would be needed to encourage business and economic sentiment. In the recent
quarters consumer sentiment has been varied-with apparel retailers reporting an improving trend
but most other retail formats still witnessing muted off take.



Retail industry has been on a growth trajectory over the past few years. The industry is expected

to be worth US$ 1.3 trillion by 2020. Of this, organized retail is expected to grow at a rate of 25%
p.a. A significant new trend emerging in retail sector is the increase in sales during discount
seasons. It has been observed of late that sales numbers in discount seasons are significantly
higher than at other times. This is prompting retailers to start discounts earlier and have longer
than usual sale season. Also, concepts such as online retailing and direct selling are becoming
increasingly popular in India thereby boosting growth of retail sector.

Another crucial structural change is expected to come in the form of implementation of FDI in

multi-brand retail. The industry players are strongly in favour of entry of foreign retailers into the
country. This will help them in funding their operations and expansion plans. The expertise and
experience brought in by the foreign retailers will also improve the way the Indian retailers operate.
It is expected to bring in more efficiency in the supply chain functions of retailers.

However, fear of loss of business for kiranawalas is still a cause of concern and is posing hurdles

in FDI implementation across country. Ironically, even though it has been some time since the
government opened the door for FDI in multi-brand retail, international retailers have not yet shown
wholehearted interest in coming to India yet. Hurdles such as requirement of clearance from
individual states, mandate of 30% local outsourcing of materials from micro and small enterprises
are keeping the investors away from India.

Retail is mainly a volume game, (especially value retailing). Going forward, with the competition
intensifying and the costs scaling up, the players who are able to cater to the needs of the
consumers and grow volumes by ensuring footfalls will have a competitive advantage. At the same
time competition, high real estate cost, scarcity of skilled manpower and lack of infrastructure are
some of the hurdles yet to be tackled fully by retailers.

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

Rural retailing is another area of prime focus for many retailers. Rural India accounts for 2/5th of
the total consumption in India. Thus, the industry players do not want to be left out and are
devising strategies especially for the rural consumer. However, players should be ready to face
some imminent challenges in rural area. For instance, competition from local mom and pop stores
as they sell on credit, logistics hurdles due to bad infrastructure in rural areas, higher inventory
expenses and different buying preferences amongst rural population.

19.) Shipping Sector Analysis Report

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

Freight rates and earnings of the shipping

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

The global shipping industry can be broadly

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

Key Points
Determined by the addition to shipping capacity
Closely related to growth in world trade.
Barriers to entry
Highly capital intensive and adequate cash flows required for funding
working capital requirements. Moreover, expertise and technical know-how
are critical factors.
Bargaining power of
Diminishing with gradual increase in fleet supply and intense global
Bargaining power of
High bargaining power as competition is high in the industry.
Competition is price based. However, companies with younger fleet
command a premium.

Financial Year '12

Freight rates in the tanker market ended the year at nearly the same level at which it started. This

was due to adverse conditions prevailing in both demand as well as supply side. On the supply
side, lower rate of scrapping and new fleet additions put pressure on freight rates. While on the
demand side, lower economic growth in OECD countries and closure of some refineries in the
developed west put additional pressure on rates. Although there were spurts witnessed in
between, steady addition of new fleet quelled any hopes of a robust ending to the year in the
terms of freight rates. World tanker fleet is believed to increase to 480 m dwt at the end of the
year, a 5% increase from the previous year.

The dry bulk business fared even worse what with freight rates ending lower than the level at

which it started the fiscal. This was on account of new building deliveries, which affected capacity
utilisation, a significant deal. Although there was increased Chinese coastal trade and prolonged
congestions, the relentless addition to fleet did not allow any improvement in the freight rates.
World dry bulk fleet increased 15% over FY11 and stood at over 630 m dwt.


Global economic growth is likely to remain weak in the near to medium term. This, along with high

crude oil prices will impact the tanker market negatively. Another concern is the tension in the
Middle East and if the same aggravates, then there will be a significant change in trade dynamics.
One good news is that the financial distress owing to weak economy could increase the speed of
scrappage, thus supporting freight rates

For the dry bulk market however, fleet additions is likely to outpace scrappages, thus putting
downward pressure on freight rates. Then there is the risk of a prolonged slowdown in China and
also in Europe which will further prevent the rates from rising.

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

20.) Software Sector Analysis Report

Global IT spending, which picked up in CY13, is expected to maintain a decent growth in CY14 as
the economic situation in the US and Europe continues to improve. Discretionary spending on IT
budgets by large global corporations has ticked up compared to last year but is limited to the new
digital technologies. In terms of industry verticals, Banking, Financial Services and Insurance (BFSI)
and Energy are the growth drivers.

Indian IT companies had a good year in terms of

financial performance, driven by factors like such as
the improvement in the quality of service offerings,
stable pricing environment and the depreciation of
the Indian rupee. Indian IT firms continue to move
up the value chain by providing more end-to-end
solutions and engaging more closely with clients.

They are also increasingly relying on internal cost

optimisation measures to improve profitability.

India's IT industry can be divided into five main

components, viz. Software Products, IT services,
Engineering and R&D services, ITES/BPO (ITenabled services/Business Process Outsourcing)
and Hardware. Export revenues, primarily on
project based IT Services continue to drive growth
with IT Services. This accounts for 54.2% of total
revenues followed by BPO and Engineering
services at 19.5%, Software Products at 15.3% and
hardware at 11%. Multi-year annuity based
outsourcing agreements continue to increase at a
steady rate. In terms of total export and domestic
Maintenance (ADM) still continue to be the bread
and butter for Indian IT companies; however
traditional services have become increasingly

Labour arbitrage has been the competitive edge of

the Indian software sector over the last few years.
However, the focus has now shifted to providing
value to clients beyond cost savings. Software
services are being increasingly demanded by global
MNCs which can boost sales as well as improve
internal efficiency.

Increasing competition, pressure on billing rates of

traditional services and increasing commoditization
of lower-end services are among the key reasons
forcing the Indian software industry to make a fast
move up in the software value chain. The
companies are now providing higher value-added
services like consulting, product development, R&D
as well as new digital technologies like social
media, mobility, analytics, and cloud computing

The new Indian government is emphasizing on

better technology enabled delivery mechanisms for
a multitude of government projects. Further, with
the new digital India initiative being launched, the
domestic market for software services looks forward
to a bright future.

Key Points
Abundant supply across segments, mainly lower-end, such as ADM. Lower
supply in higher-end areas like IT/Business Consulting, but competition is very

The global downturn had put considerable pressure on global IT spending but
the situation is now improving.
Barriers to entry
Low, particularly in the ADM & BPO segments as these are prone to relatively
easy commoditization. It's high in value-added services like IT/Business
Consulting and R&D where in-domain expertise creates a barrier. The size of a
particular company/scalability and brand-image also creates barriers to entry; as
such firms have built up long-term relationships with major clients.
Competition is global in nature and stretches across boundaries and
geographies. It is expected to intensify due to the attempted replication of the
Indian offshoring model by MNC IT majors as well as small startups.
Substitution of IT
services and
IT continues to be a driving force towards all aspects connected with our lives.
While a particular technology may become obsolete and a particular company
specializing in it may suffer, the obsolete technology can only get substituted by
a newer technology offered by the same/different player in the IT/ITES industry.

Financial Year '14

The Indian IT/ITES industry earned revenue of over US$ 109 bn during FY14. Out of this, exports
accounted for 69.7% of the industry's revenue.

In terms of growth by industry verticals, BFSI, Telecom, Manufacturing and all emerging verticals
are expected to grow at 14%, 9%, 14% and greater than 14% respectively.

The USA accounts for about 53% of the export revenue followed by the UK and Continental

Europe, with 15% and 10% respectively. Other regions such as Asia Pacific are catching up, with
a contribution of 6.5%.

At the end of FY14, India's share in the global outsourcing market stood at 55%.



As per NASSCOM, the Indian IT/ITES industry is expected to maintain a growth of 13-15% in
FY2015. NASSCOM has also envisaged the Indian IT/ITES industry to achieve a revenue target
of USD 225 bn by 2020 for which the industry needs to grow by about 13% on a YoY basis in the
next six years.

Technology research firm Gartner, expects global IT services spending to grow marginally by 4.2%
in CY2014 to cross US$ 3,749 bn. As the global sourcing industry continues to grow and as Indian

IT companies continue to increase market share, outlook for the sector remains robust.

Emerging protectionist policies in the developed world are expected to affect the Indian IT

companies. Due to US restrictions on visas as well as rising visa costs, most Indian IT companies
are increasingly subcontracting onsite jobs to local employees in the US. Additionally, the new
immigration bill is still under consideration in the US which, if implemented, will significantly raise
employee costs for onsite workers. This would adversely affect margins of Indian IT companies.

Indian IT companies are increasingly adopting the global delivery model. They are setting up

development centers in Latin America, South East Asia and Eastern European countries to take
advantage of low cost and also cater to the local market. In the US, such centers will help mitigate
the risks of the new immigration bill and increase the probability of winning projects in highly
regulated sectors such as healthcare, government services, utilities etc.

ADM services, which used to provide major chunk of revenues to the domestic IT players, are

getting affected due to the falling billing rates. Hence, the companies are now venturing into new
high value services such as IT Consulting, Product Development, and the new digital SMAC

The integration of IT-BPO contracts is expected to become more common, as clients look out for

end-to-end service providers. Large Indian companies like Infosys, TCS, Wipro, Tech Mahindra
and HCL Technologies, will benefit from this trend.

Billing rates are expected to remain under pressure in the short term. Therefore companies are

expected to preserve their margins through effective cost containment measures like shifting more
wore work offshore and improving employee utilisation. Lessons learnt during the global financial
crisis can benefit them in the long run.

Billing rates are expected to remain under pressure due to commoditization of traditional services.

Therefore companies are expected to preserve their margins through effective cost containment
measures like shifting more wore work offshore, improving employee utilisation and the increasing
use of automation software.

21.) Steel Sector Analysis Report

The Indian steel industry continued to showcase trends of higher consumption of finished steel.
Currently, the steel consumption in India is second only to China. However, with the steel
consumption in China expected to moderate at around 3%, India is likely to emerge as the fastest
growing steel consuming nation. Further, India's current per capita finished steel consumption at 52
kg is well below the world average of 203 kg. With rising income levels expected to make steel
increasingly affordable, there is vast scope for increasing per capita consumption of steel.

Being a core sector, steel industry tracks the

overall economic growth in the long term. Also,
steel demand, being derived from other sectors
like automobiles, consumer durables and
infrastructure, its fortune is dependent on the
growth of these user industries. The Indian steel
sector enjoys advantages of domestic availability
of raw materials and cheap labour. Iron ore is also
available in abundant quantities. This provides

major cost advantage to the domestic steel


The Indian steel industry is largely iron-based

through the blast furnace (BF) or the direct
reduced iron (DRI) route. Indian steel industry is
highly consolidated. About 60% of the crude steel
capacity is resident with integrated steel
producers (ISP). But the changing ratio of hot
metal to crude steel production indicates the
increasing presence of secondary steel producers
(non integrated steel producers) manufacturing
steel through scrap route, enhancing their
dependence on imported raw material.

Key Points

With trade barriers having been lowered over the years, imports play an
important role in the domestic markets.


The demand is derived from sectors that include infrastructure, consumer

durables and automobiles.

Barriers to entry

High capital costs, technology, economies of scale, government policy.

Bargaining power
of suppliers

Low for fully integrated players who have their own mines for raw materials.
High, for non integrated players who have to depend on outside suppliers for
sourcing raw materials.

Bargaining power
of customers

High, presence of a large number of suppliers and access to global markets.

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

Financial Year '14

The world Gross Domestic Product (GDP) is expected to grow by 3.4% in 2014. With advanced

economies expected to do well in 2015, the global growth projection for 2015 is 5%. (Source:- IMF
& SAIL annual report) This is despite the fact that there was a noticeable slowdown in the
emerging market and developing economies during 2013, a reflection of the sharp deceleration in
demand from key advanced economies. As such, we reckon that while global prospects have
improved but the road to recovery in the advanced economies is still uncertain and volatile.

World crude steel production grew at 3% reaching 1,606 MT in 2013, as per World Steel

Association (WSA). The growth in production is coming mainly from Asia, as the crude steel
production in all other regions (except Africa) declined in 2013. China's crude steel production
increased 6.6% YoY to 779 MT in 2013. However, the EU recorded a negative growth of 1.8%
compared to 2012.


The Indian metals and mining sector is currently facing a multitude of challenges like weak macro

environment, leveraged balance sheets and heightened regulatory risks. The sector has suffered
valuation de-rating since FY12 due to various factors like environmental and regulatory concerns,
cost increases, delayed projects and high interest rates.

Government delays in allocating coal blocks for captive consumption by steel manufacturers

seriously hurt the competitive edge of the Indian steel sector. Same was the story with iron ore.
There are delays in allocating iron ore mines as well as approval for mining licenses. As a result,
no new investment in the steel sector is happening to add new steel capacities.

There are trends of demand recovery in the property sector and the demand for infrastructure has

also been strong since the Modi government came to power. However, underlying demand in the
EU is not expected to improve much in 2014. Overall, steel demand is expected to remain weak
due to the continuing economic crisis in the developed countries and the structural shift in the
Chinese economy. Moreover the world is reeling under the pressure of large surplus capacity
which will remain a serious cause of concern, especially in times of subdued global demand.

GDP growth in India stood in the region of sub 5% in FY14 on account of stalled investment

against the backdrop of tightening policies, widening trade and fiscal deficit, high inflation and
weak FDI inflows. Further, FY14 was also a year of subdued activity for steel using sectors in
particular the auto segment. It is expected that the next fiscal will continue to remain a challenging
year for the automotive sector if interest rates remain high. However, decline in fuel expenses
(which has been the case recently) may help a bit.

Steel demand in India has remained sluggish so far in 2014 amidst weak activity and poor

sentiment; however, activity is expected to accelerate modestly in the coming years.

Strengthening domestic consumption and improving external conditions will help underpin the
growth of steel using sectors.

22.) Telecom Sector Analysis Report

India's teledensity has improved from under 4% in March 2001 to around 75.23% by the end of
March 2014. Cellular telephony continues to be the fastest growing segment in the Indian telecom
industry. The mobile subscriber base (GSM and CDMA combined) has grown from under 2 m at the
end of FY00 to touch almost 932 m at the end of March 2014. Tariff reduction and decline in handset
costs has helped the segment to gain in scale. The cellular segment is playing an important role in
the industry by making itself available in the rural and semi urban areas where teledensity is the

The fixed line segment continues to decline

terms of the subscriber base. It has declined
28.59 m subscribers in March 2014 from 30.21
in March 2013. The decline was mainly due
substitution of landlines with mobile phones.

As far as wireless broadband connections (>=512

kbps) are concerned, India currently has a
subscriber base of about 43.2 m. Broadband
penetration received a boost from the auction of
broadband spectrum. The contribution of data to
revenues continues to grow steadily for all leading


telcos. This bodes well for the future of broadband

services. Consumption of data services is growing
at an exponential pace.

Key Points
Intense competition has resulted in prompt service to the subscribers.
Given the low tariff environment and relatively low rural and semi urban
penetration levels, demand will continue to remain higher in the foreseeable
future across all the segments.
Barriers to entry
High capital investments, well-established players who have a nationwide
network, license fee, continuously evolving technology and lowest tariffs in
the world.
Bargaining power
of suppliers

Bargaining power
of customers

Improved competitive scenario and commoditisation of telecom services has

led to reduced bargaining power for services providers.

A wide variety of choices available to customers both in fixed as well as

mobile telephony has resulted in increased bargaining power for the

Competition has intensified with the entry of new cellular players in circles.
Reduced tariffs have hurt all operators.

Financial Year '14

After the fall in mobile subscriber base in FY13 due to the cancellation of spectrum licenses of
some of the operators in February 2012, the sector bounced back by adding about 60 m wireless
subscribers in FY14. At the end of March 2014, the countrys total telecom subscriber base (fixed
plus mobile) stood at about 931.95 m. The tele-density level stood at about 75.23% by the end of
the fiscal.

Data source: Trai, Company Data

Data source: Trai, Company Data

In February 2014, the government concluded the auction process for 900 and 1,800 MHz

spectrum. Out of the 431.2 MHz that was put up for auction, 353.2 MHz was sold for a
consideration of Rs 611.622 bn.

During FY14, the Indian government issued new merger and acquisition (M&A) norms as well as
fixed the uniform license fee at 8% of adjusted gross revenue (AGR) for all telcos for the unified



The fixed line business continues to remain muted despite the low penetration levels in the
country. The increasing demand for data based services such as the Internet will act as major
catalysts in the growth of this segment. However, the growth continues to be mitigated by
increasing substitution of landlines by mobile phone. The PSUs will however continue to retain
their dominant position. This is on account of high capital investments required in setting up a
nationwide network.

Increasing choice and one of the lowest tariffs in the world have made the cellular services in India
an attractive proposition for the average consumer. The teledensity in urban areas is nearly 150%.
Therefore the main driver for future growth would be the rural areas where wireless tele-density is
around 43.67%. .

After a failure of not one but two rounds of spectrum auction, the government finally concluded the
auction process for 900 and 1,800 MHz spectrum. Out of the 431.2 MHz that was put up for
auction, 353.2 MHz was sold for a consideration of Rs 611.622 bn. The operators are still in need
of spectrum for their 3G roll out plans. In addition to this the prices for the upcoming license
renewal would also be decided on the basis of the auction price. Therefore the operators are keen
that the reserve prices of 2G and 3G spectrum be kept as low as possible. However, whether this
happens or not, remains to be seen.

The operators margins improved during FY14. Due to reducing competition, tariffs remained
stable. The operators continued to see better realizations. This is more a function of the
elimination and cutting down of subscriber related costs rather and free promotional offers than an
increase in tariffs. Therefore there has not been any adverse impact on usage despite better
realized rates. Rationalization of costs and tariffs is expected to continue in the current fiscal as
well. This will be aided by good growth in the rural and semi-urban customer base.

Balance sheets of operators continue to remain under pressure. Operators took a lot of debt in the

process of shoring up funds for the license renewals and payments of one time fees. The
incumbents Bharti Airtel and Idea Cellular have raised money through stake sales and qualified
placements respectively and in the case of Bharti, the sale of its tower assets in Africa.

23.) Textiles Sector Analysis Report

As per the Ministry of Textiles, the Indian textile industry contributed about 14% to industrial
production, 4% to the countrys GDP and 17% to the countrys export earnings in 2013. It provides
direct employment to over 35 m people and is the second largest provider of employment after

According to the Ministry of Textiles, the domestic

textile and apparel industry in India is estimated to
reach US$ 141 bn by 2021 from US$ 58 bn in 2011.
Apparel exports from India is expected to increase to
US$ 82 bn by 2021 from US$ 31 bn in 2011. Total
cloth production in India is expected to grow to 112
bn square metres by FY17 from 62 bn square metres
in FY11.

India enjoys a significant lead in terms of labour cost

per hour over developed countries like US and newly
industrialised economies like Hong Kong, Taiwan,
South Korea and China. As per data from National
Bureau of Statistics, due to steep wage inflation, the
average wage cost in China stood at US$ 450 per
month in 2012 as against US$ 200 per month in
India. Also, India is rich in traditional workers adept at
value-adding tasks, which could give Indian
companies significant margin advantage. However,
India's inflexible labor laws have been a hindrance to
investments in this segment. Unlike in home textiles,
garment capacities are highly fragmented and leading
Indian textile companies have been slow to ramp up
their apparel capacities, despite strong order flows
from overseas buyers who are trying to diversify out
of China.

The textile industry aims to double its workforce over

the next 3 years. As a thumb rule, for every Rs1 lac
invested in the industry, an average of 7 additional
jobs is created.

Key Points
Despite some pick-up in demand from both global and domestic markets,
most new capacities in the apparel and home textile segments are not
operating at full capacities.
High for premium and branded products due to increasing per capita
disposable income.

Barriers to entry
Superior technology, skilled and unskilled labour, distribution network, access
to global customers
Bargaining power Because of over supply in the unorganised market like that of denim, suppliers
of suppliers
have little bargaining power. However, premium products and branded players
continue to garner higher margins.
Bargaining power Domestic customers - Low for premium and branded product segments.
of customers
Global customers- High due to presence of alternate low cost sourcing
High. Very fragmented industry. Competition from other low cost producing
nations is likely to intensify.

Financial Year '14

Textile exports did remarkably well in an otherwise dull exports scenario in FY14. A weaker rupee

and firm overseas demand helped the sector add US$ 4 bn to overall exports of US$ 312 bn,
second only to engineering goods. Readymade garments, which accounts for nearly half of all
textile exports at US$ 14.9 bn, grew 15.5%. Cotton yarn and fabrics grew 18% to US$ 8.9 bn,
while manmade textiles grew nearly 13% to US$5.7 bn.

Most companies in the sector timed their expansion plans FY04 onwards, so as to avail

themselves of the funding under TUF (Technology Upgradation Fund, offering loans at 6%
subsidy). This led to the capex-spending phase in the textile sector peaking in the last three
fiscals. However, with the slump in demand for textile products from the overseas markets, a
number of companies had to defer their expansion plans due to large under-utilised capacities.

Relatively lower cost of cotton helped the margins of export dependant textile industry in the

second half of FY14. However, since these trends are temporary in nature, pressure on margins
could increase the debt levels for players in the sector.



Textile exports in FY15 are expected to grow by 25% to US$ 50 bn. Incremental capital

investments in debt reliant textile industry could, however, remain subdued given banks
unwillingness to lend to the sector and higher cost of funds.

A slew of measures have been recommended for reforms in labour laws particularly for textile
sector pending lengthy legislative amendments of labour laws.

Improving capacity use across the textile value chain is driven by a pick-up in both export and

domestic demand as reflected in a healthy order book. Although the Indian government has
reduced interest subsidy benefits to standalone spinning projects to 2% from earlier 4%-5%, capex
could be imminent in weaving, processing and garmenting segments. This is in view of the
improved sector outlook, near full use of existing capacities and continued subsidy benefits under

the Revised Restructured Technology Upgradation Fund Scheme notified in October 2013..

India and China are currently competing in the same categories (premium segment) of apparels
and home textiles and given Indias established presence in the high end segment, India could
gain significant market share in US apparel imports. However, the ongoing economic slowdown in
the US could result in lower orders from US retailers that, in turn, may result in lower capacity
utilisation and impact profitability of textile companies in India.

As per the 12th Five Year Plan, the Integrated Skill Development Scheme aims to train over

2,675,000 people within the next 5 years (this would cover over 270,000 people during the first two
years and the rest during the remaining three years). This scheme would cover all sub-sectors of
the textile sector, such as textiles and apparel, handicrafts, handlooms, jute and sericulture.