Roland Berger India Chem 20101109 Methanol PDF

2010
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Handbook on
Indian Chemical Industry
Prepared by :
Disclaimer:
All rights reserved. Includes copyrighted material.
The same may not be reproduced, distributed, modified or in any manner communicated to any third party except with the written approval of Tata
Strategic Management Group.
This report is for information purpose only. While due care has been taken during the compilation of this report to ensure that the information is
accurate to the best of Tata Strategic Management Group's knowledge and belief, the content is not to be construed in any manner whatsoever as a
substitute for professional advice. Tata Strategic Management Group accepts no responsibility for any loss arising from any action taken or not taken by
anyone basis this report.
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CONTENTS
2010
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 01
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05
Industry Reports
1. Basic Organic Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 09
2. Petrochemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3. Fertilizers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4. Chlor Alkali . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
5. Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
6. Agrochemicals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
7. Specialty Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
8. Biotechnology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
9. Petroleum, Chemical and Petrochemical Investment Regions (PCPIRs)
and their impact on Indian Chemical Industry . . . . . . . . . . . . . . . . . . 119
10. Process Plant and Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1274
Thought Notes
1. Indian Chemical Industry - The Road Ahead . . . . . . . . . . . . . . . . . . . . 137
2. M&A opportunities in Chemical Industry . . . . . . . . . . . . . . . . . . . . . . 145
3. Competing successfully in Indian Specialty Chemicals Industry . . . . . 155
4. Chemical Industry needs more 'Explorers' . . . . . . . . . . . . . . . . . . . . . 163
5. Hazardousness of Chemical Industry . . . . . . . . . . . . . . . . . . . . . . . . . 169
6. Acting green - Philosophy to results: An Indian perspective . . . . . . . 177
7. Will India be the next big green growth market? . . . . . . . . . . . . . . . . 185
8. Emerging opportunities in Indian Pharmaceuticals industry . . . . . . . 191
9. Contract research - Deriving strategic value from . . . . . . . . . . . . . . . 199
emerging markets
10. Raising India's 'Pulse' rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
11. Water is everybody's business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
12. Well being in India: Disparity and surprises across districts . . . . . . . . 219
13. Are family-owned businesses sustainable? . . . . . . . . . . . . . . . . . . . . 223
2010
Jai Hiremath
Chairman, National Chemicals Committee, FICCI
Vice Chairman & Mg. Director, Hikal Ltd.
As you are kindly aware that FICCI jointly with Dept of Chemicals & Petrochemicals, Govt. of India is
organizing 6th edition of INDIACHEM 2010 an international exhibition and conference on Chemicals,
Petrochemicals, Pharmaceuticals, Process Plant and Automation Systems on October 28-30, 2010 at
Mumbai. This follows the immense success of the earlier five editions in 2000 and 2002 at New Delhi,
2004, 2006 and 2008 at Mumbai.
The biennial event has served as a platform for interaction between the Indian and foreign chemical
industry. The event showcases the strength and the potential of the Indian chemical, petrochemical and
pharmaceutical industry in products as well as services and provides opportunities to formulate business
alliances for growth of trade and investment in these sectors.
Phenomena like accelerated globalisation, business and changing pace of technology have brought in
their wake sweeping changes and abundant opportunities for companies to grow and prosper globally in
both traditional and non-traditional industries. Chemical and allied sectors are no exception to this. The
chemical industry is one of the oldest industries in India. It has played a significant role in the country's
ongoing metamorphosis from an agrarian economy to an industrialized economy.
The chemical sector including pharmaceuticals and petrochemical has an annual turnover of
approximately US $ 83 billion, which is equivalent to about 5% of India's GDP. It is the 12th largest in the
world in terms of volume and the third largest in Asia. Over the last decade this sector has evolved from
being a basic chemical producer to an innovative industry. With investment in R&D this industry is
registering a significant growth in the knowledge sector, especially the specialty and fine chemicals
segments.
The Government of India is committed to providing comprehensive infrastructure to the industry. Since
the chemical industry requires specialised infrastructure, it has been the endeavor of the Government to
promote the creation of world class infrastructure that fulfils the requirements of this industry. With this
background the Govt. approved the policy Investment Regions for the Petroleum, Chemical &
Petrochemical. The infrastructure would be such that it not only spurs the growth of the industry at
the selected location but also helps in introducing economies of scale and synergy, making the units
cost competitive. It has the added advantage of providing linkages to suppliers and markets to seize
the emerging opportunities in the chemical sector.
The comprehensive Report prepared by FICCI and Tata Strategic Management Group (TSMG) would
help potential foreign and domestic investors in understanding the vast investment opportunities
available in Indian Chemical Industry. The report will also serve as a ready reckoner for those connected
with Chemical Industry.
The conference and exhibition will provide an excellent opportunity to show case the major technical
development and serve as a platform to exchange ideas and information between the Indian and foreign
participants. This is in every way the most timely initiative and I am sure the participants would benefit
immensely from the endeavour.
I wish the event all success.
Handbook on Indian Chemical Industry 01

Global Chemical Industry -
Perspective of a changing framework
2010
After a long period of prosperity, the global chemical industry was hit double in
2008/2009, firstly by the end of the "natural" cycle the chemical industry is
experiencing, secondly by the financial crisis that impacted all regions and
businesses in a similar way, something that hasn't happened and has not been
expected by any industry specialists.
Now, luckily, the sales as well as the profits have been going up steeply and a number
of companies are exceeding each other announcing the "best ever" 6 month period
for the first half of 2010. Besides such exciting news and the fact, that growth rates
are starting to decline in the second half initiating a discussion of a "V" vs. a "W"
economic development, the fundamental question is, what the long-term future of
the chemical industry will look like.
Overall, the global chemical industry is facing a number of structural framework
changes that
will request the established players to adopt to the new circumstances
l
offer opportunities for existing ones further leveraging their particular strengths
l
and
give new players a window of opportunity to enter the global stage.
l
The financial crisis was not the reason for these changes, but provided a sense of
attention and urgency in the industry that has not existed to that extent before. On a
high level, the following three key topics will be crucial for the future success of
chemical companies
1. Understanding and participating on ongoing strengthening of Asia
2. Finding concepts to run feedstock cost driven businesses also in non-upstream

regions
3. Understanding and fulfilling future customer industry expectations globally but
also within regional specific
Strengthening of Asia
It is needless to say, that the demand growth is in Asia, in particular in China but also
in India and a number of South-eastern Asian countries. Today, Asia is already the
leading market for chemical industry globally, accounting for 38% of global sales
followed by EU27 and NAFTA at 29% and 21% respectively. China accounts for
almost half of the chemical sales in Asia, followed by Japan and India. Asia's share in
global chemical production has increased significantly in the last decade, from ~27%
to 38% from 1998 to 2008. What is not true looking 20 years ahead, or at least
capable of being misunderstood, is the widely used phrase of "demand shift". The
02 Handbook on Indian Chemical Industry

demand shift has happened in the past, but is largely completed, customer industries
like textile and leather, as classic examples, have completed that years ago. What is
essential to understand is, that emerging markets show stronger growth potential
and have proven to do so even in the financial crisis, e.g. with China showing approx.
5% growth even in 2009 and the markets are becoming critical size. The impact of
2010
these developments has to be analyzed differently for global majors and the local
champions in these countries.
For the global majors, the crucial questions will be the strategy around how to
participate on this growth, including asset and investment allocation, exports vs.
local production, adoption of business models, cooperation with locals vs. stand-
alone activities and many more. Above all this is the need to achieve and sustain a
profitability that satisfies their shareholders. And, not to be forgotten, to maintain
and ideally increase the business in the strong home markets Europe and the US
these will even in the next 20 years account for a very large portion of global
chemical business:
For the local champions, the challenge consists of two steps. First step is the coverage
and supply of domestic markets not leaving them to the global majors, and secondly
the subsequent development of a global business where sustainable competitive
advantages can be achieved. A good example for this is API production, where
according to industry reports, Indian and Chinese producers already cover 65-70%
of the world market
Concepts for feedstock driven commodities

In feedstock driven commodities (in particular petrochemicals and polyolefins) the
increasing production capacity in low feedstock cost countries is a historical fact and
is likely to continue. However, it is clear amongst industry experts, that Middle East
will never serve the whole world. Considering that, the long-term challenge for the
chemical industry is to find the right balance between low cost production hubs and
local/regional commodity production close to the customers. Western Europe and
the US have been through this process to a large extent already, plant closure and
efficiency gains as well as value chain integration efforts have shown results. Looking
to China and India as the major countries of future demand, both have shown a
strong will to establish and maintain a commodity industry themselves, however the
strategies are different.
While China is putting a lot of effort into developing a coal-based petrochemical
industry (and by doing so relying on the domestic carbon feedstock) and successfully
invites international partners to do so, the Indian Government has set up PCPIRs with
strong focus on downstream integration, providing an ecosystem for chemical
companies to prosper. This is an India only effort so far, and international companies
are not heavily involved yet. Irrespective of which strategy will be more successful, it
clearly shows that these regions are willing and able to develop a commodity industry
on their own, but, also as a matter of fact, that has to prove its position in a global
context still.

Understanding customer industries' needs
Last but not least, the global chemical industry has to face the challenge to
complete its transformation from a production and technology driven industry to a
2010 customer oriented one. Given the complexity and the tremendous range of products
and services offered by the chemical industry, this will play a more prominent role for
customer oriented segments like specialty chemicals than for specification-based
commodities. There is for sure no "one-size-fits-all" approach, but the following two
issues will play a strong role in terms of future profitability
Adapting product developments to the actual needs of the customers, in mature
l
countries where customer industries are not willing to pay for the best possible
product/service anymore but only for the best suitable one, as well as adapting
product portfolio and service to the local needs of emerging markets e.g. a
growing middle class in India getting access to chemical related products has
different needs and perceptions vis--vis mature European group of customers
And in particular local companies are "naturally" positioned best to fulfill these
needs
Set up organizations (from sales force to group structures) that allow to most
l
efficiently target these customer groups. A number of companies have already
designed their front end according to customer groups (e.g. DuPont), and this is
likely to continue
Implications for India

Summarizing, it becomes clear that the global future of the chemical industry will
look substantially different than today. There will be a place for everybody - the global
majors of today, the world-scale Middle East commodity producers as well as local
champions in India and elsewhere developing their home markets. But amongst all
groups, the successful ones will be those who manage to adapt early to the upcoming
changes and doing so, create a long-lasting competitive advantage. Indian chemical
players are excellently positioned in this "new game", supported by a PCPIR
infrastructure being built, having a government that understands and supports the
needs of the chemical industry, being located in one of the most prosperous
markets in the world and last but not least being able to rely on a well skilled and
educated workforce. Taking these good staring points combined with the
entrepreneurial spirit, social and political responsibility and a forward looking
understanding of the future framework provides an excellent outlook to the Indian
Chemical industry.
By-Dr. Alexander Keller, Partner - Energy & Chemicals, Roland Berger Strategy Consultants

2010
Global Chemical Industry
Globally, the chemical industry is estimated to be ~USD 3.4 trillion. Global chemicals
industry grew at a healthy rate of ~9% p.a. during the period 2004-2008. However,
the industry went through a dramatic downturn in 2008-2009 due to the global
economic recession. In 2009, the global chemical industry is estimated to have seen a
decline of 4.5 5% over 2008 levels as demand from large end-use industries such
as construction, automotives, electronics etc. fell massively worldwide. The
downturn witnessed shutting down and idling of significant capacities and other cost-
cutting measures like workforce reduction.
Global chemicals industry Fy 10

(USD Bn, % share)
Agrochemicals,
50, 1% Biotechnology
Specialty 180 , 5%
Chemicals, 740
22%
Base Chemicals,
1,525 , 45%
Pharmaceuticals
900 , 27%
Total: USD 3,395 Bn
Source: Datamonitor, Tata Strategic Analysis
Post 2009, as global economy has started recovering, chemicals industry is starting to
register slow volume growth due to restocking and revival of underlying demand.
While the recovery in Europe is still sluggish, America is expecting a V-shaped
recovery curve as per the American Chemistry Council and China saw a 21% y-o-y
growth in chemicals output in October 2009. However, it is expected that with
subdued demand in near future and reduced margins due to poor capacity utilization,
it might still take 2-3 years before the global chemicals industry is back to the growth
rate levels of 2008. During the period 2008-2013, the chemicals industry is expected
to grow at ~5.3% CAGR.

Chemical Industry Classification
Tata Strategic has classified the chemical industry into 5 key segments, based on a
detailed analysis of various industry classifications followed by several domestic &
2010 international bodies. The key segments are:
1. Base chemicals: Petrochemicals, man-made fibres, industrial gases, fertilizers,
chlor-alkali and other organic & inorganic chemicals
2. Specialty chemicals: Dyes & pigments, leather chemicals, construction chemicals,
personal care ingredients and other specialty chemicals
3. Pharmaceuticals: APIs and formulations
4. Agrochemicals: Insecticides, herbicides, fungicides and other crop protection
chemicals
5. Bio-technology: Bio-pharma, bio-agri, bio-industrial
Base chemicals segment is the largest, accounting for ~45% of the total industry.
Under base chemicals, petrochemicals segment is showing an upswing in polymer
and resin prices.
Pharmaceuticals segment is the next biggest segment, accounting for ~27%. Though
the segment was not severely impacted by the downturn, it witnessed reduced R&D
spending. Post recession, while large markets like US and Western Europe are slowing
due to saturation and patent expiry of key blockbuster drugs, developing regions like
Asia and Latin America are experiencing strong growth driven by increasing
prevalence of diseases, rising healthcare expenditure and CRO. However, the much
sought after outsourcing hubs like China and India are facing stiff competition from
new geographies like Eastern Europe and Central and South America.
Specialty chemicals segment is the third largest segment accounting for 22% of
overall industry. While the recession highlighted the vulnerability of specialty
chemicals to economic cyclicality, the segment is expected to register higher sales in
2010 with improving demand. US specialty chemicals companies are looking to post
stable margins backed by forecasted real GDP growth of 1.9%. European specialty
chemicals giants Clariant and Rhodia turned profitable in Q3 FY10 driven by cost-
cutting initiatives.
Globally, biotechnology accounts for 5% of the total market. The segment saw a
slowdown in growth to 4% in 2009 compared to growth rate of 12% before the
downturn.
The global agrochemicals market (1% of total chemicals) is expected to complete its
recovery in 2010 with growth resulting from rising prices and positive volume effects.
Indian Chemical Industry

Total size of the Indian chemical industry in FY10 is estimated to be ~USD 83 Bn. Base
chemicals is the largest segment accounting for ~53% of the total industry, followed
by pharmaceuticals with 24%.

Indian chemicals industry Fy10
(USD Bn, % share)
Agrochemicals
Biotechnology
2, 2%
2.5, 3%
2010
Specialty
Chemicals, 15
18%
Base Chemicals,
43.3, 53%
Pharmaceuticals
20, 24%
Total: USD 83 Bn
Source: Industry reports, Tata Strategic Analysis
Base chemicals has a lager share of the domestic chemicals industry vis--vis global.
Base chemicals are raw material driven; bulk manufacturing chemicals produced by
standardized reactions unlike pharmaceuticals, and specialty chemicals which are
more R&D intensive, high value, low volume chemicals.
Petrochemicals (Olefins and aromatics) form the largest sub-segment of the base
chemicals industry. Olefins demand in India is expected to grow at 10% per annum
while aromatics demand is expected to grow at 12% per annum over the next four-
five years. India is soon expected to be among the world's top 5 manufacturers of
petrochemicals products ETA and poly-propylene.
Pharmaceuticals is the second largest segment with 24% share. Over the last 30
years, India's pharmaceutical industry has evolved from being a marginal global
player to becoming a world leader in the production of high quality generic drugs.
India exports pharmaceutical products to more than 200 countries. Exports of drugs
and pharmaceuticals from India rose by 25% to ~ Rs. 384 billion in FY09 compared to
~ Rs. 307 billion in FY08.
Indian specialty chemicals industry is expected to return to pre-recession growth in
the next couple of years primarily driven by large demand in end use industries like
automotives, electronics, packaged food, textiles etc. and strong domestic capability
being supplemented by both domestic and international investments. Many foreign
companies have made significant commitments to India and have plans to continue
to invest over the long term not only because of the abundant availability of skilled
and cheap labor but also because of the certainty of potentially huge markets.
Biotechnology accounts for 3% of the total chemicals industry. Indian biotechnology
industry crossed the USD 3 billion mark in FY10 (including bio-services and bio-
informatics), registering a y-o-y growth of 17%. The industry is fragmented in nature
with presence of over 300 domestic and international companies. However, it is
witnessing several partnerships/ acquisitions as companies try to expand capabilities
and capacities.

Agrochemicals comprise ~2% of the total industry. The agrochemicals consumptions
in India (580 gms/ hectare) is low compared to global standards of 10-12 kg/ hectare.
Indian agrochemicals industry is largely exports driven with over 60% of production
being exported to USA, U.K., Russia, Europe, South Africa, Bangladesh, Malaysia etc.
2010
CONCLUSION
Strong end use industry demand is expected to boost growth for the Indian chemical
companies, both domestic & multinational.
Increasing local production requires global competitiveness to withstand imports as
well as for exports of surplus. Key success factors needed are feedstock cost &
availability, value chain access, technology, capital investment, presence of strong
local players as well as access to a rapidly growing large domestic market. India is
today seen as a growth market for many western companies. Domestic companies
have built significant assets and have the opportunity to leverage them and will need
to strengthen them further to withstand global competition. It could be worthwhile
to explore partnerships, in select areas, for mutual beneficial development.

Basic Organic Chemicals
Introduction
Organic chemicals are a significant part of Indian chemicals industry. The chart below
shows select major organic chemicals. Availability of natural gas for use as feedstock
is a critical part of the entire production process. Formaldehyde and acetic acid are 2010
important methanol derivatives and are used in numerous industrial applications.
Phenol is an aromatic compound and derived from Cumene, a benzene and
propylene derivative.
Select organic chemicals
Feedstock (Natural Gas/Naphtha)
Methanol Benzene
Acetic Acid Formaldehyde Cumene
Phenol Urea
Formaldehyde Formaldehyde Phenol
Indian Organic Chemicals Industry

Industry Overview
The consumption of organic chemicals in India has increased at a CAGR of 6.4% from
2.02 million metric tons per annum (mmtpa) in FY04 to 2.76 mmtpa in FY09. The
domestic supply however, has shown a negative CAGR of 2.3% to reach 1.31 mmtpa
in FY09 against 1.47 mmtpa in FY04. The deficit has been met by a large increase in
imports over the years. The net imports have grown at a CAGR of more than 20%
2.8
Demand & Supply 2.6
(Mn tons)
2.4
2.2
2.0 2.0
1.5 1.6 1.5 1.5

1.5
1.3
FY 04 FY05 FY06 FY07 FY08 FY09

Demand Supply
Source: Dept. of Chemicals & Petrochemicals

from 0.55 mmtpa in FY04 to 1.51 mmtpa in FY 2009. The major reason of lower
domestic production of organic chemicals has been oversupply in global markets
leading to cheaper imports of organic chemicals into India. As a result, the capacity
utilization levels of domestic producers have fallen from 92% in FY04 to 65% in FY09.
2010 Even after discounting the impact of the global economic crisis on the Indian
industry, the average utilization levels have been around 80% in FY07 and FY08.
Production details of major organic chemicals in India

No. Organic Chemical Production (000 tons) Share in
Fy07 Fy08 Fy09 Fy09
1. Methanol 396 351 237 18%
2. Formaldehyde 235 243 232 18%
3. Acetic acid 288 316 266 20%
4. Phenol 71 75 76 6%
5. Others 555 567 506 38%
Total 1,545 1,552 1,317 100%
Source: Dept. of Chemicals & Petrochemicals, CMIE
The major organic chemicals are methanol, acetic acid, formaldehyde and phenol. The
four chemicals constitute around 60% of total organic chemicals produced in India in
FY09.
Post the global economic crisis, the production of organic chemicals in India is also
expected to have recovered and reached 1.5 mmtpa in FY10.
Key Segments
Methanol
Methanol, a very versatile chemical is primarily produced from natural gas or naphtha.
Demand and supply of methanol (Mn tons, Fy09)

0.01 1.3
1.06
0.24
Production Import Export Consumption

Source: CMIE report

Demand for methanol has increased at a CAGR of 10% from 0.8 mmtpa in FY04 to 1.3
mmtpa in FY09. The domestic production of methanol is not sufficient to meet the
demand of methanol in India. As a result, in FY09, the net import of methanol was
1.06 mmtpa i.e. more than 4 times the domestic production of 0.24 mmtpa. Import of
methanol has increased at a high CAGR of 22% from 0.4 mmtpa in FY04 to 0.85 2010
mmtpa in FY09.
The two main end-user industries of methanol are chemicals and energy. In the
chemicals industry, methanol is used mainly to manufacture formaldehyde, acetic
acid, di-methyl terephthalate (DMT) and some solvents. In the energy industry,
methanol goes into the manufacture of methyl tertiary butyl ether (MTBE), tertiary
amyl methyl ether (TAME), di-methyl ether (DME) and bio-diesel among other
chemicals. Methanol is also used for blending with petrol.
Over the years the usage pattern of methanol has remained same. However, share of
formaldehyde in sectoral usage of methanol has improved from 34% in FY06 to 38%
in FY09 primarily due to increase in demand of formaldehyde from plastic and paints
industries. The demand of methanol for production of DMT has fallen primarily due
to closure of Bombay Dyeing's DMT plant.
Indian manufacturers have small capacities compared to global standards. GNFC, the
largest producer of chemicals in India has a capacity of 230 kilo tons per annum (kta)
followed by Deepak Fertilizers and Rashtriya Chemicals and Fertilizers Ltd (RCF) with
capacities of 100 kta each.
Sectoral usage of methanol

(% share)
FY06 FY09
Others Others
18% Formald 20% Formald
hyde yde
Acetic 34% 38%
Acid Acetic
9% Acid
9%
DMT
9% DMT
2%
Pharma MTBE
Pharma MTBE
14% 16%
15% 16%
Source: Crisil research, Tata Strategic analysis
Acetic Acid
Acetic Acid is the main alcohol based chemical and is primarily used in the production
of Vinyl Acetate Monomer (VAM), Purified Terephthalic Acid (PTA), Acetic Anhydride
and Acetate Esters. The Acetic acid derivatives are applied in various industries as
mentioned in table below:

S. N Derivatives Applications
1. Vinyl Acetate Monomer Adhesives, textiles, paints and paper
2. Purified Terephthalic Acid (PTA) PET bottle resins, films and polyester fibre
2010 3. Acetic Anhydride Cellulose Acetate which goes in cigarette
filters and textile applications
4. Acetate Esters Solvents in a wide variety of paints, inks and
other coatings
Demand for acetic acid has grown at a CAGR of 10% from 0.34 million tons in FY04 to
0.55 million tons in FY10.
The demand growth has happened mainly due to increase usage by manufacturers of
PTA and organic esters such as RIL and Vinyl Chemicals. New PTA capacities added by
Indian Organic Chemicals (IOC) (0.55 million tonnes per annum) and RIL (0.53 million
tonnes per annum) in the recent past have spurred demand growth further.
Most of the demand was met through domestic production earlier. However, due to
oversupply of acetic acid in global markets and depressed prices, imports of acetic
acid have grown from 0.02 mmtpa in FY04 to 0.29 mmtpa in FY09. Cheap imports
have led the domestic manufacturers to reduce their plant capacity utilization.
Market size of acetic acid is estimated to be around Rs. 1,450 crores in India in FY09,
of which imports constitute more than 50%. Major acetic acid producing companies
in India are GNFC, Jubilant Organosys and IOC. Acetic acid is manufactured in India
Demand and supply of acetic acid

Mn tons, Fy09
0.01
0.29 0.55
0.27

Source: CMIE report
through two routes: the methanol route and the ethyl alcohol (from molasses) route.
Manufacturing acetic acid using methanol is more cost-competitive and, therefore,
more profitable. GNFC is the only company in India to manufacture acetic acid
through the methanol route. It has a competitive advantage in acetic acid because of

the assured supply of the raw material and its lower cost of production and hence,
was able to hold its 30% market share in a weak global price scenario.
Formaldehyde
Unlike methanol, production of its derivative formaldehyde in India is sufficient to
2010
meet the domestic demand. The production of formaldehyde has increased, at a
similar pace as has its demand, at a CAGR of 3% from 0.20 mmtpa in FY04 to 0.23
mmtpa in Fy09.
Demand and supply of formaldehyde

Mn tons, FY09 0.23 0.23
Production Consumption
Source: CMIE report
Market size of formaldehyde is estimated around Rs. 190 crores in India. Total
production capacity is 0.23 mmtpa in FY09. Major formaldehyde producing
companies in India are Kanoria Chemicals, Hindustan Organic, Rock Hard and Asian
Paints. The first two companies account for 44% of formaldehyde production in India.
Asian Paints produces formaldehyde for captive consumption.
Phenol
Derivatives Applications
Phenolic resins Plywood adhesives, construction, automobile
& appliance industries
Caprolactam Nylon and synthetic fibre
Bisphenol-A Polycarbonates in electronics and housing industries
Phenol is a significant type of organic chemical with numerous applications as

mentioned in the table below. Its demand is closely linked to end user industries like
the construction and automobile industries.
More than 70% of demand of phenol is met through imports with no fresh supply
addition in last few years. There are only two suppliers - Hindustan Organics and S I
Group with capacity of 40 Kta each in FY09. As the consumption has grown from 0.18

mmtpa in FY04 to 0.23 mmtpa in FY09, the imports has grown at a higher CAGR of 8%
to meet the rising demand. The total market size is Rs. 1,800 crores approximately in
India in FY09 including imports.
2010 More than 70% of demand of phenol is met through imports with no fresh supply
addition in last few years. There are only two suppliers - Hindustan Organics and S I
Group with capacity of 40 Kta each in FY09. As the consumption has grown from 0.18
mmtpa in FY04 to 0.23 mmtpa in FY09, the imports has grown at a higher CAGR of 8%
to meet the rising demand. The total market size is Rs. 1,800 crores approximately in
India in FY09 including imports.
Demand and supply of phenol

Mn tons, FY09 0.02
0.17
0.23
0.08

Source: CMIE report
Key Trends
Market Trends:
Focus has moved from west to east. There is an increase in M&A activities and
l
setting up of new plants in China, Middle East and Russia. The latter two being
rich in feedstock and the former being the driver of demand.
Demand for methanol based MTBE manufacturing has been declining due to
l
environmental concerns. In the US, MTBE is getting phased out leading to fall in
methanol demand by 3 mn tons.
Demand from new applications such as DME and bio-diesel is on the rise
l
Technology Trends
Increased acceptance of methanol over olefins and over propylene technologies
l
Regulatory Trends
Government of India continues to provide duty protection to domestic
l
manufacturers. For example, in case of phenol, the custom duty of 7.5% was
maintained in Union Budget 2009-10 whereas the excise duty was reduced from
16% to 8%.

Recently, Government has also levied anti-dumping duty on import of phenol
l
from countries such as USA, South Korea and Taiwan.
Growth Forecast & Drivers

2010
Indian organic chemicals market is expected to grow at a growth rate of 5% to reach ~
3.53 mn tons by FY14. Key segments expected to grow are methanol and phenol.
1. Rise in methanol demand: Domestic methanol demand is expected to grow at a
CAGR of 6.8% from FY10 to FY14. The key growth drivers are growth in
construction, infrastructure and new areas such as fuel blending and bio diesel.
The demand from the formaldehyde segment (largest user of methanol) is
expected to grow at 8%. Despite the higher operating rates expected in future,
more than 2/3rd of demand will still be required to be met by imports.
Methanol Market Outlook
RHS LHS
Demand & Supply (Mn tons) Operating rate (%)
1.5 100
80
1
60
40
0.5
20
0 0
FY10 FY11 FY12 FY13 FY14
Demand Production Operating rate
Source: Crisil report, Tata Strategic analysis
2. Rise in phenol demand: The demand of phenol is expected to grow at a CAGR of

8% from 0.14 mmtpa in FY10 to reach 0.19 mmtpa in FY14. The improvement in
demand is primarily driven by growth in application of phenolic resins in the
decorative laminates sector, dyes and drugs in pharmaceutical industries. growth
in application of phenolic resins in the decorative laminates sector, dyes and drugs
in pharmaceutical industries.

Phenol Market Outlook
RHS LHS
Demand & Supply (Mn tons) Operating rate (%)
2010 0.2 100
99
0.1
98
0 97
Demand Supply Operating rate
Key Challenges
1. Lack of cheaper raw material availability: Feedstock (naphtha and natural gas)
and power are critical inputs for organic chemicals industry. Costs of these raw
materials are high in India compared to countries like China, Middle East and other
South East Asian countries such as Thailand and Indonesia. Given the poor
infrastructure with lack of adequate facilities at ports and railway terminals and
poor pipeline connectivity, domestic manufacturers will continue facing difficulty
in procuring raw materials at a cost competitive with the global peers.
2. No domestic price discovery: Domestic prices of organic chemicals are highly
correlated with international prices. Given the small scale of domestic operations,
local manufacturers are more influenced by global demand and supply forces.
3. Large global capacity additions: Apart from the current oversupply in global
markets, there is another cause of concern for domestic manufacturers, with
further large capacity additions happening in global markets. For example,
globally, methanol industry is expected to witness excess capacity in the future
due to a spate of capacity additions in gas rich countries such as Middle East and
Russia. In China itself, 20 million tons of methanol capacity is expected to be
coming upstream by 2010.

Methanol capacity additions
Year Regions Capacity (Mn tons)
2009 China (delayed) 20
2010 Egypt, Russia 1.6
2010
2011 Middle East, South East Asia 4
South America
4. Low capacity utilization: Due to oversupply in global markets, prices of major

organic chemicals have taken a steep decline, thereby forcing the domestic
companies to under utilize their plants operating levels. The average capacity
utilization has fallen from > 90% in FY04 to 65% in FY09. Though, post the global
economic crisis in FY09, utilization levels have improved, but are still far behind
the utilization levels of more than 90%.
Key Opportunities
1. Consolidation: Since most of the Indian manufacturers operate on a small scale
compared to global peers, there is a room for consolidation in Indian organic
chemicals industry. Domestic players can take advantage of economies of scale
arising from consolidation and become more competitive thereby preventing
cheaper global imports.
2. Improved feedstock supply: Domestic organic chemicals players don't have the
advantages of backward integration and hence, they lack pricing flexibility.
However, given the new finds of natural gas reserves in the country, domestic
manufacturers will be able to get supply of feedstock at stable prices.
3. Wider product portfolio: Commodity chemicals companies can improve their
product portfolio by adding specialty chemicals such as polymers additives, water
treatment chemicals, lubricating additives, etc. This will help in improving their
margins but requires significant R&D efforts.
4. Forward integration: Petrochemical companies producing benzene and
propylene can look for forward integration opportunity given the demand-supply
deficit in phenol market. Similarly, an opportunity exists for companies with
better access to natural gas supply to venture into the methanol market facing
continuous supply deficit.
5. Outbound approach: Even successful companies from west are shifting their base
to resource rich nations like Saudi Arabia, Qatar, Russia, etc. Indian organic
chemical companies may also explore opportunities outside the country either
through greenfield or brownfield projects.

References
1. Annual Report 2009-10, Department of Chemicals & Petrochemicals
2010 2. Performance of Chemical & Petrochemical Industry at a Glance (2001 - 2007),

Department of Chemicals & Petrochemicals
3. Working Group on Indian chemical industry for formulation of the 11th Five Year
Plan, Planning Commission, Government of India
4. Commodity Chemicals: Industry Profile, Crisil Research, January 2010
5. Industry: Market Size & Shares, Centre for Monitoring Indian Economy, April 2010
6. GNFC Analyst Report, ICRA Research, June 2010
This report has been authored by:

Pratik Kadakia (Pratik.kadakia@tsmg.com) and Chirag Surana

Petrochemicals
Introduction
Petrochemicals are chemicals made from petroleum and natural gas. Currently
naphtha and natural gas are the main feedstock as they are most easily processed
into basic petrochemicals. Olefins such as ethylene, propylene, butadiene and 2010
aromatics such as benzene and toluene are basic petrochemicals and their further
derivatives are known as end products petrochemicals such as polymers, synthetic
fibers, elastomers and surfactants.
Global Petrochemicals Industry

Size of the petrochemical industry is determined by the size of ethylene and
propylene capacity built. Both constitute almost 70% of global basic petrochemicals
market. Global ethylene capacity was estimated at 130 million tons in 2009 and is
expected to achieve a CAGR of 3% to reach 155 million tons in 2014. Whereas, global
propylene capacity, estimated at 90 million tons in 2009, is expected to achieve a
CAGR of 5% to reach 115 million tons in 2014. Based on their cumulative capacity and
overall market share, the market size of basic petrochemicals was USD 320 billion in
2009 and is expected to reach USD 385 billion in 2014.
Global Market Size

(USD Bn) 385
4%
320
2009 2014
Major countries are North America, Western Europe and East Asia and major
petrochemical companies are Lyondell-Basel, Dow, Sinopec, Exxon and Ineos.
Indian Petrochemicals Industry

Industry Overview
As a downstream industry of exploration and refining business, the petrochemicals
industry is a significant industry for the Indian economy. The Indian basic
petrochemicals market grew at a rate of 5% from USD 5 billion in FY2005 to an
estimated USD 6.5 billion in FY2010. Considering end products market which includes

polymers, synthetic fibers, elastomers and surfactants, the total petrochemical
market has grown at a CAGR of 8% from USD 6.8 billion in FY2005 to USD 10 billion in
FY2010.
2010 India is the fifth largest consumer of polymers in the world after China, United States,
Japan and Germany.
By global standards, its contribution is not very large, primary reason being low per
capita consumption of polymers in India, only 5 kgs, compared to world average of 25
kgs.
The Indian petrochemicals market is influenced by international demand and supply
forces as the domestic market is oversupplied. The total installed capacity of major
basic petrochemicals (ethylene, propylene, butadiene, benzene & toluene) in FY2005
was 5.97 million metric tons per annum (mmtpa) against the total demand of 5
mmtpa, leading to a surplus of 0.97 mmtpa. This surplus got further increased to 1.59
mmtpa by FY2010 as capacity additions grew at faster pace than demand.
Basic petrochemicals installed capacity and demand ('000 tons)

8,120
6,530
5,970
5,000
FY05 FY10
Capacity Demand
Even in the end products petrochemicals market (polymers, elastomers, synthetics

fibers and surfactants), the oversupply gap has increased from 0.74 mmtpa in FY2005
to 1.76 mmtpa in Fy2010

Key Segments
End products petrochemicals installed capacity and demand ('000 tons)
11,840
10,080
2010
7,540
6,800
FY05 FY10
Capacity Demand
Polymers: Polymers are popularly known as plastics, Polyethylene, polystyrene,

polypropylene and polyvinyl chloride are major types of polymers. Consumption of
polymers has increased from 61% to 69% of total volume of major end products
petrochemicals between the period FY2005 and Fy2010.
End product petrochemicals market: share (% of total)
6% 6%
4% 2%
23%
28%
69%
61%
FY05 FY10
Polymers Synthetic Fibers Elastomers Surfactants
Source: Industry Report, Tata Strategic Estimates
Synthetic Fibers: Synthetic fibers account for about half of all fiber usage, with
applications in every field of fiber and textile technology. The market share of
synthetic fibers has decreased from 28% in FY2005 to 23% in FY2010.
Elastomers: Elastomers are polymers with elastic properties. They find applications in
manufacturing of various types of tyres and non-tyre goods. Share of elastomers have
declined from 6% in FY2005 to 2% in FY2010.

Surfactants: Surfactants stabilize mixtures of oil and water and find application in
detergents, emulsifiers, etc. Its share has remained same in overall market at 6%.
Segment Major Products Main Applications

2010 Polymers Polyethylene, polystyrene Packaging, Carrier bags, extrusion
polypropylene, polyvinyl coating
chloride (PVC)
Synthetic fibers Polyester, nylon, acrylic fiber Fiber and textile technology
purified terephthalic acid
Elastomers Styrene butadiene rubber Tyres, toys, consumer items
poly butadiene rubber
plasticized PVC
Surfactants Linear alkyl benzene and Detergents, emulsifiers, foaming
ethylene oxide & conditioning agents
Competitive Landscape - Polymers Industry

Polymers constitute 70% of end products petrochemicals market in India. Indian
polymers industry is oligopolistic in nature with only 3 large producers - Reliance
Industries Ltd. (RIL), Haldia Petrochem Ltd (HPL) and Gas Authority of India Ltd (GAIL).
Market entry barriers are high with high start-up costs and raw material costs. Post
acquisition of IPCL, RIL has obtained majority of the market share (70%) of total
polymers market followed by HPL and GAIL (11% respectively). RIL produces all forms
of polymers namely Polyethylene (PE), Polypropylene (PP) and Poly vinyl chloride
(PVC). HPL and GAIL produce PE and PP but don't produce PVC. Other domestic
players are Finolex Industries, DCW, Chemplast and DCM Shriram. All of them
produce only Poly vinyl chloride (PVC).
Major polymers facilities in India (FLY10)
Kota Capacity in mmtpa

(0.07) Auriya Existing
Baroda (0.51 ) plants
Haldia
(0.38) (1.04)
Jamnagar
(1.93)
Gandhar
(0.47)
Company Feedstock Focus Capacity
Hazira
(1.20)
RIL & Natural PE, PP
Gas/ PVC 4.74
IPCL Naphtha
Nagothane
(0.47) PE, PP 1.04
HPL Naphtha
Mettur
Ratnagiri (0.24) GAIL Natural PE 0.51
(0.26) Gas
Finolex Natural PVC 0.26
Gas
Patalganga Tuticorin
(0.29) (0.09) Chempl Naphtha PVC 0.24
ast
DCW Naphtha PVC 0.09
Source: Crisil Report, Tata Strategic
DCM Naphtha PVC 0.07

Key Trends
Market Trends
Increase in global demand: Global demand for ethylene is forecasted to grow at a
2010
CAGR of 4.5% and that of propylene to grow at a CAGR of 5.5% between period
2010 and 2014. Ethylene and propylene will continue to have major share (80%) of
total petrochemicals demand
Capacity expansion: Between 2010 and 2014 ethylene capacity additions is
expected to grow by 22 million tonnes. Major capacity build up is happening in

China, large demand centre and Middle East, ethane rich region towards the end
of 2010.
Depressed margins: With oversupply hinging in the global petrochemicals market,
margins will increasingly come under pressure in early 2011.

Low utilization levels: Global capacity utilization levels are expected to be at all
time lows of 80% in 2011 as compared to 90% now.
Technology Trends
Product switch: Linear low density polyethylene is increasingly replacing the usage
of low density polyethylene in India. Only 1 ton of ethylene is required to produce

1 ton of LLDPE whereas > 1 ton of ethylene is required to produce 1 ton of LDPE
Change in feedstock mix: With increase availability of natural gas and new gas
finds, the dependency on naphtha as major feedstock for petrochemicals

complexes have reduced. In Middle East, substantial capacity additions will be
based on ethane as a feedstock.
Regulatory Trends
Loss of duty protection: Government's protection cover is getting eroded gradually
with import duties on feedstock naphtha increased from 0% to 5% in Union Budget

2007-2008. Also on final products, import duties have been reduced over the years
from high of 70% in early 1990s to 5% (basic duty) in 2006.
Reduced fiscal benefits: As India is fast becoming a refining and petrochemical
surplus nation, Government has also taken away the income tax holidays and
other fiscal benefits from the industry. Only oil exploration companies now enjoy
the benefits based on the profit-sharing mechanism with the government.

The demand for basic petrochemicals is expected to grow at a CAGR of 9% to reach
10.27 mmtpa by FY2015. However, market will still be oversupplied to the tune of 1.7
mmtpa in FY2015. The demand growth will be driven by olefins segment including
ethylene, propylene and butadiene. Demand as well as capacity growth in aromatics
such as benzene and toluene will be marginal compared to overall market size.
Indian end products petrochemicals market is also expected to grow at a CAGR of 9%
to reach 15.1 mn

Basic petrochemicals: Demand and supply forecast
Capacity ('000 tons) Demand ('000 tons)
Total 11,970 Total 10,270
2010
8,120
4,300 6,530 4,300
3,300 2,780
5,460 4,850
3,040 2,900
FY10 FY15
FY10 FY15
Ethylene Propylene Butadiene Benzene Toulene
Source: Crisil Report, Department of Chemicals & Petrochemicals (GoI), Tata Strategic analysis
tons by FY2015. The surplus capacity is also expected to grow from 1.76 mmtpa in
FY2010 to 3.28 mmtpa in FY2015. The major drivers for demand growth are:
End products petrochemicals: Demand and supply forecast

Capacity ('000 tons) Demand ('000 tons)
Total 18,440 Total 15,160
11,840 4,500 10,080

2,800
2,290
3,800
11,040 11,260
7,240 6,980
FY10 FY15
FY10 FY15
Polymers Synthetics Elastomers Surfactants
Source: Crisil Report, Department of Chemicals & Petrochemicals (GoI), Tata Strategic analysis
1. Low per capita consumption: Consumption pattern in India varies from that of
the world. Per capita consumption of polyolefins in India was 6 kgs. in 2009
compared to global average of 25 kgs With the economic growth expected to
continue, this gap is also expected to narrow down significantly.
2. Rise in polymers demand: The demand of polymers is expected to grow at a
CAGR of 10% from 6.98 mmtpa in FY2010 to reach 11.26 mmtpa in FY2015. The
high growth in demand is primarily driven by growth in packaging, infrastructure,
agriculture, healthcare and consumer sectors. As per a Goldman Sachs report, the
packaging sector itself will constitute 6.2 mmtpa of polymers demand by FY2012.

3. Development of PCPIRs: Development of Petroleum, Chemicals & Petrochemicals
Investment Regions across India is also expected to induce development of
industries consuming petrochemicals as major raw material. Till now PCPIRs have
been approved in states of Andhra Pradesh, Gujarat, West Bengal and Orissa.
PCPIR project in Orissa alone is expected to invite Rs. 2.3 lakh crore worth of 2010
investment from petroleum and petrochemicals sectors. Similar scale of
investments is envisaged in other approved projects.
Key Challenges
1. Volatility in raw material prices: More than 50% of global petrochemical
capacities are based on naphtha, a crude oil derived product. The prices of crude
oil products have witnessed significant volatility, thereby making petrochemicals
prices highly volatile.
2. Increased competition: Large capacity additions taking place in ethane rich
Middle East and demand rich China. Out of the 22 million tons of ethylene
capacity additions expected during period 2010 and 2014, 9 million tons is
expected in Middle East alone. Since, ethane based petrochem products are
cheaper than petrochem products in India, domestic producers are expected to
witness margins pressure.
3. High entry barriers: Given the capital intensive nature of the petrochemical plant
and tariff barriers, new entrants and small and medium size companies are
prohibited from easily entering into the market.
4. Low capacity utilization: Due to oversupply in global markets, prices of
petrochemicals have taken a steep decline, thereby forcing the domestic
companies to under utilize their plants operating levels. The average capacity
utilization has fallen from 95% levels before global economic crisis to 80% in
2009. Even post crisis, the capacity utilization rates are below 90%.
Key Opportunities
1. Backward & forward integration: Given the volatility of crude oil prices and
India's heavy dependency on oil imports, there is opportunity for oil and oil
related companies to reap benefits of increase in presence across the value chain.
For e.g Reliance Industries Ltd. successfully backward integrated from refining
and petrochemical company to oil and gas exploration. IOC which is primarily a
refining PSU has ventured into exploration in the past and currently building
greenfield petrochemical projects.
2. Improved feedstock supply: Availability of feedstock dictates the location of the
plant. Domestic products are uncompetitive due to high costs of naphtha when
compared with ethane based products from Middle East. One means to improve
the competitiveness of the domestic products is by improving the infrastructure
support as is the case in Middle East, China and Singapore. Also going forward, as
more natural gas becomes available in India, the domestic players are likely to
shift from naphtha to cheaper natural gas thereby increasing their
competitiveness in the market.

3. More value-add products in portfolio: Demand for performance plastics such as
biodegradable polymers is expected to be on rise across the world including
India. Given the environment concerns with traditional plastics, companies
should look at expanding their portfolio and include more value add products.
2010 4. Increased geographical presence: Given the capital intensive nature of the
project and high costs associated in India (due to no duty waivers, no/ very less
tax exemptions and high interest costs), the domestic companies may also look
outside for organic and inorganic opportunities. Many western companies such as
Dow, Shell, etc are increasing their presence in energy rich countries like Saudi
Arabia, Kuwait, Qatar, etc. and setting up manufacturing facilities.
References
2. Performance of Chemical & Petrochemical Industry at a Glance (2001 - 2007),
Department of Chemicals & Petrochemicals
3. Working Group on Indian chemical industry for formulation of the 11th Five Year
Plan, Planning Commission, Government of India
4. Petrochemicals: Industry Profile, Crisil Research, August 2010
5. Petrochemicals: Opinion, Crisil Research, August 2010
6. PCPIR Orissa Article, Business Standard, August 14 2010

Pratik Kadakia (Pratik.kadakia@tsmg.com) and Chirag Surana

Fertilizers
Global Fertilizer Industry
Fertilizer consumption in FY09 had declined by 7% from FY08 to reach 156.7 million
tons nutrients. Because of the highly fluctuating crop and fertilizer prices during the
financial crisis, farmers in most countries (India being an exception) reduced or 2010
postponed investments in agricultural inputs.
The improved economic and financial situation is expected to have a positive effect
on fertilizer demand. Stable commodity prices make it less risky for the farmers to
invest in fertilizer.
Global fertilizer industry is expected to grow at 3% CAGR till 2015.
Global fertilizer demand

(Mn ton nutrients) 188.3
3% 183.7
179.1
174.7
170.4
162.5
FY10 FY11 FY12 FY13 FY14 FY15

Source: IFA
Factors affecting fertilizer demand

1. Increasing food grain consumption is a major demand driver for fertilizers.
According to Food and Agriculture Organization of the United Nations (FAO) the 2010
world cereal output is expected to reach 2.28 billion tons. This would be 2%
World Cereal Production and Utilization

(Mn tons)
Production Utilization
2,400
2,300
2,200
2,100
2,000
1,900
1,800
2002 2004 2006 2008 2010
Source: FAO

increase over the previous year. World cereal utilization, currently at 2.25 billion tons,
has been rising at 2.0-2.5% over last 8 years.
2. Scope for expanding cultivated land in the next five years is limited. The per capita
2010 land availability is expected to go down to 0.15 Hectare by 2015. Hence yield gains
are expected to contribute to most of the output growth. This will lead to increased
usage of fertilizer per hectare of land.
World - Available arable land per capita

(Hectare)
0.27
0.15
1998 2015E
Source: Yara fertilizer handbook, PotashCorp
3. Biofuel production using cereals, sugar cane and oilseeds as feedstock is another
major driver for fertilizer demand. About one-third of US maize, 55% of Brazilian
cane and two-thirds of EU rapeseed were used as feedstock for biofuel in 2009.
Increased demand for biofuels would require higher production of these
feedstocks. Biofuel production also influences the prices of these feedstocks
which has a larger indirect impact on fertilizer demand.
The forecast for fertilizer demand is subject to major

uncertainties
The evolution of current economic situation poses a major uncertainty for fertilizer
demand. If the economic situation in some of the major economies does not
improve, it could lead to increased speculation in agricultural commodities which
directly affects fertilizer demand. Some other uncertainties include evolution of policy
priorities in China, the fertilizer scheme in India (two large fertilizer consuming
countries) and bio-fuel consumption which will be affected by governments' priorities
on climate change.

Fertilizer consumption in India
Fertilizer Product Consumption: India
(Mn tons)
7.4 7.0 7.1 8.2 8.6 8.8 9.0

2010
7.0 6.8 7.2 8.6 9.4 9.7 10.1
9.2 9.7 10.2 10.9 11.8 11.9 12.1
26.6 26.5 27.9 29.1 30.9

29.9 31.4
FY09 FY10 FY11 FY12 FY13 FY14 FY15

Urea DAP Other complex Other
Source: Crisil, IFA
India is one of the major regions contributing to the rising fertilizer demand. A better
monsoon and higher prices of farm goods are expected to increase fertilizer
consumption in FY11 compared to FY10. Monsoon rains in June-September this year,
a key factor in fertilizer demand, was 2% above the normal.
The fertilizer demand in India is expected to grow at 4% CAGR from FY09 to reach 63
Mn tons in FY15, higher than the global growth rate of 3% during the same period.
Global Urea Outlook

Urea is a widely consumed fertilizer product. It contains the nutrient N only. Of all
nutrients, application of N was the least affected during the recent crisis. N-fertilizers
need to be applied through the life cycle of crop and demand for it is mainly inelastic.
Global Urea demand-supply

(Mn tons)
193.4
179.1
162.9 169.9
155.6
169.7 174.5
158.4 163.5
151.2
2010 2011 2012 2013 2014

Demand Supply
Source: IFA

Global urea demand is expected to grow by 4% CAGR, to reach 174.5 Mn tons by
2014. The growth rate is expected to be higher in the case of South Asia driven
primarily by India.
2010 The growth in capacity addition, however, will outpace the demand. According to The
International Fertilizer Association (IFA), global urea capacity is expected to grow by
6% CAGR to reach 222 Mn tons in 2014. This would result in a supply of 193.4 Mn
tons in 2014. Between 2009 and 2014, about 55 new plants are planned to come on
stream. East Asia will contribute 32% of net increase in capacity.
Urea capacity in low-cost feedstock regions to meet world

demand
Natural gas is the most efficient feedstock for Urea production; most of the global
capacities are based on natural gas. West Asia with vast natural gas availability has
become a major hub for urea manufacturing. It is also a major exporter of urea. Coal
is used as a feedstock in China due to its easy availability.
China has world's largest urea capacities but it mostly caters to domestic
requirement. Hence incremental capacities which would be important from trade
point of view are those which would come from low consumption regions i.e. West
Asia and Africa.
Region wise incremental capacity and consumption of urea

(2015 over 2009, Mn tons)
20 18
18 Incremental capacities
16
Incremental consumption
14 14
12
10 10
8
5 5
6 4
3 3
4
3
2 2 2
0.5 0.5 1
0
sia
sia
ia
ica
ica
A
ric
As
C
EA
SA
er
er
Af
EE
W
Am
m
LA
Source: Crisil, IFA

N
North America, Western and Central Europe are expected to add limited capacities
due to high cost of natural gas in these regions. Increase in demand is expected to
outpace the increase in capacity in South Asia.
The incremental capacity in West Asia and Africa is expected to meet the demand of
the deficit regions.

India Urea Outlook
India currently relies heavily on import to fulfill its urea demand. India imported 5.7
Mn tons of urea in FY09 to meet its demand of 26.2 Mn tons.
2010
Trend in Urea demand-supply scenario
(Mn tons)
35 9
30 31
29
30 27 28 8
26
25 7
20 6.6 6
6.2 6.3
15 5.7 5.8 5
10 4.5 4
5 3
0 2
production consumption import

Source: Tata Strategic analysis, FAI
This dependence on import is expected to continue in near future since urea capacity
is not expected to increase enough to meet the 4% annual increase in demand.
India's urea demand is expected to reach 31 Mn tons in FY14 whereas domestic
capacity is only expected to supply 24 Mn tons.
Urea production in India

In India approximately 85% of urea production is based on captive ammonia
production while ammonia is procured externally only for the remaining 15%. Major
feedstocks used for urea manufacturing are natural gas, naptha, coal, fuel oil or LSHS.
Of all the feedstock mentioned here, natural gas is most cost effective and resultant
urea manufacturing cost is lowest. But traditionally majority of urea manufacturing in
India were naptha based. Retention pricing scheme (RPS), introduced in 1977,
assured 12% return on net worth of fertilizer plant and hence there was no clear
incentive for cost cutting.

Feedstock wise share of captive ammonia capacity
(% of total)
Fuel oil Coke oven
9% gas, 1%
2010 Caprolactum
1%
Naptha
17%
Natural
Gas, 72%
Source: Crisil, FAI
Recent policy developments in India:

Nutrient based subsidy scheme (NBS)
The NBS scheme, in effect from April1 2010, is an attempt by the government to
encourage balanced fertilizer consumption in India. As per the policy, subsidy on
complex fertilizers would be calculated based on nutrient level and not at the product
level. Through this, govt. has changed the subsidy from constant farm gate prices to
constant subsidy. Producers now have the freedom to charge retail prices. Following
the policy announcement, players hiked DAP prices by around Rs. 600 per ton. Prices
of other complex fertilizers were also raised.
Urea has been kept out of this policy, but its maximum retail price was increased by
10% from Rs. 4,830 to Rs. 5,310 per ton with effect from April 1.
The result has not been very encouraging in the limited time frame with most farmers
still preferring to use urea, the cheapest fertilizer. The sale of urea in kharif 2010
season, up to July 31, rose to 7.4 Mn tons from 6.8 Mn tons in the same period last
year.
Greenfield projects at IPP-linked prices

Govt. of India introduced an investment policy in 2008 to overhaul production of urea
in the country and reduce dependence on import. As a part of this policy revamping
of existing urea unit plants and brownfield projects were encouraged through IPP-
linked prices.
However, for Greenfield projects the govt. decided prices based on competitive
bidding. As per the policy the govt. decides the location and potential investors bid
for the project. Whoever agrees to sell it by taking lowest amount of subsidy from the
govt. wins the bid. This policy failed in its attempt at putting up new Greenfield urea
plants in India.

The New Urea Investment Policy 2010, to be released by the end of this year, is
expected to make the policy more investor friendly. All Greenfield projects would be
assured a price which is 95% of IPP. The policy is also planned to provide additional
benefits for reviving the sick units under the Fertilizer Corporation of India (FCI) and
Hindustan Fertilizer Corp Ltd. 2010
It is estimated that nearly Rs. 30,000 crore investments would come up in next 3-4
years if the policy is made truly investor-friendly and sufficient gas is made available.
Global Phosphatic Fertilizer Outlook

Rock phosphate is the key raw material for manufacturing of DAP, MAP, TSP and other
NPK fertilizers. Almost all of rock phosphate is converted into phosphoric acid and
85% of phosphoric acid is converted to phosphatic fertilizers.
Global rock phosphate capacity is expected to increase by 4% CAGR to reach 228 Mn
tons by 2014.
Global Phosphate Rock Capacity

(Mn tons)
250
4% 228
220
211
205
200 190 196
150
100
50
0
2009 2010 2011 2012 2013 2014
Source: IFA
Rock phosphate reserves are mainly concentrated in China, Morocco and US. Top 5
rock-phosphate producing countries account for about 80% of world production.
China is the largest producer and consumes almost all its production. The US is the
second largest producer and consumer. Morocco is the third largest producer and
largest exporter of phosphate rocks.

Limited addition of phosphoric acid (P2O5) supply in the near
term
Global phosphoric acid demand is expected to increase by 4% CAGR to reach 43.6 Mn
2010 tons by 2014.Global supply on the other hand is expected to increase by 4.4% CAGR
to reach 47.1 Mn tons by 2014.
The global phosphoric acid supply/demand gap is expected to grow from 2 Mn tons in
2010 to nearly 3.4 Mn tons in 2014 with commissioning of new projects.
Global Phosphoric Acid demand-supply

(Mn tons)
50 47.1
45.3
43.3
41.5
39.6
40 43.6
42.3
40.6
39.2
37.6
30
20
4%
10
0
2010 2011 2012 2013 2014
Source: IFA Demand Supply
The main addition to supply would be in China, Morocco, Brazil and Saudi Arabia.
Region wise P2O5 capacity
(Mn tons)
18 2009 4
2014
16 3.6 Incremental capacities (RHS)
14
3
12
10
2
8
6
1.2 1
4
2 0.7 0.7
0.6
0 0.2
0 0
E Asia S Asia W Asia EECA N Africa L
Source: IFA America America

P2O5 capacity addition ('000 tons)
Region 2010 2011 2012 2013
China 2,680 1,500 1,020
Morocco 730 450 900 2010
Brazil 240 2,900 2,000
Tunisia 360
Jordan 500
Saudi Arabia 1,800
Venezuela 320
Vietnam 325
Egypt 600
Source: IFA
Global DAP demand to rebound

Di-ammonium phosphate (DAP) contains both N and P type nutrients with higher P
percentage. It is applied mainly to meet the P requirement of the soil. DAP is the most
consumed amongst all phosphatic fertilizers.
DAP demand is mostly elastic unlike Urea demand. It is mainly used during sowing
and its reduced application does not result in immediate adverse effect on yield. The
global DAP demand declined by 8% in 2008 over 2007 during the economic crisis.
Global DAP Consumption 5 year CAGR

(Mn tons) of 6.3%
26.9 25.6 33.0
3.7 5.2
5.6
2.1 2.9
2.0
3.1 4.1
4.6
10.6 14.0
7.2
7.5 6.2 8.5
2004 2009 2014

E Asia S Asia N America L America ROW
Source: IFA, Crisil

Going forward DAP demand is expected to be strong, primarily driven by India
(Largest importer of DAP), China and North America. It is expected increase by 6%
CAGR to reach 33 Mn tons by 2014.
2010 Major capacity expansions for DAP

Global DAP/MAP capacity is expected to rise by 4% CAGR to reach 42.5 Mn tons by
2014. Bulk of this incremental capacity is coming up in reserve rich regions of East
Asia, North America and Africa.
India Phosphatic Fertilizer Outlook

Trend in DAP demand-supply scenario
(Mn tons)
14
11.8 12
12 10.9
10.2
9.7
10 9.2
8 8
7
6 6.2 5.9
5.2
4.6
4
0
Production Demand Import
Source: IFA
Indian DAP demand is expected to increase by 5% CAGR and reach 11.9 Mn tons by
2014.
Domestic DAP production declined in FY09 as there was a fall in international prices
of DAP without a similar fall in the prices of raw material. The rise in DAP
consumption was met by increasing imports. India is currently the largest importer of
DAP in the world.
Import of DAP is expected to rise from 6.2 Mn tons in FY09 to ~8 Mn tons in Fy14.
DAP and other complex fertilizers can be manufactured in same unit. The availability
of other complex fertilizers is very limited in the international market compared to
DAP availability. Hence, producers are expected to manufacture greater quantities of
other complex fertilizers in the unit and meet DAP deficit through imports.

Fall in DAP price made imports sustainable
Rock phosphate, ammonia and sulphur are the main feedstock for manufacturing
DAP/MAP. Of these three, rock phosphate is the most critical feedstock and is not
available in India. 2010
When DAP price peaked in 2008 the subsidy bill increased for Govt. of India (GoI).
This led the govt. to promote Indian DAP manufacturers to scout for rock phosphate
reserves globally. Syria, with high phosphate rock reserves was looked as a good
investment opportunity. India's Oswal chemicals and fertilizer limited has plans to
operate a phosphate-refining plan in Syria, it has signed an MOU with the Syrian govt.
International DAP Prices

($/ton)
1,200
1,000
1,128
800
600
400 610
541 540
430 450 470
200 400
331
0
2006
2007
2008
2009
2010 P
2011 P
2012 P
2013 P
2014 P
Source: Crisil, Fertecon
International DAP prices have moderated after reaching its peak in 2008. This has
made import of DAP more sustainable.
Global Potash Outlook

Muriate of Potash (MOP) contains potassium nutrient. Like DAP its demand is mostly
elastic. Potash fertilizer demand in 2009 was down by 8.6% over 2008. Farmers rather
opted to mine their soils to utilize the accumulated nutrient reserve in the soil.

Global Potash Supply/Demand Balance
(Mn tons)
50
2010 45.8
42.9
41.4
39.2
40 38
34.7 35.8
30 33.5
32
29.9
20
4.6%
10
0
2010 2011 2012 2013 2014
Source: IFA Demand Supply
Global Potash demand is expected to grow at 4.6% CAGR to reach 35.8 Mn tons by
2014. Demand will be primarily driven by East Asia (mainly China), Latin America,
North America and South Asia (mainly India).
Global potash capacity is expected to increase from 41.6 Mn tons in 2009 to 54.7 Mn
tons in 2012. This would mean a supply of 47.1 Mn tons in 2014. The additional
capacity is expected to come mainly from Canada and Russia.
M&A in global potash industry

BHP Bilton is trying to acquire Potash Corporation which controls 18% of world
market for Potash. Earlier this year, two Russian major companies Urakali and Silvinit
announced that they are being merged and the combined company would control
10% of global Potassium market.
The global Potash trade is heavily cartelized with two companies Canpotex and
Belarussian Potash Company controlling 70% of the global capacity and influencing
the prices. Canpotex represents North American producers Potash Corp, Mosaic and
Agrium, whereas Belarussian Potash Company represents Russian producer Uralkali
and Belaruskali of Belarus. BHP has mentioned that if it becomes successful in
purchasing Potash Corp, it would eventually sell potash through its own channel and
not through Canpotex. The acquisition of Potash Corp is also likely to have an effect
on supply levels, as the company has curtailed production to support prices during
times of weak demand, while BHP is inclined to run operations at their full capacity.

India Potash Outlook
Consumption of 'K' nutrient declined from 3.3 Mn tons in FY09 to 3 Mn tons in FY10.
The demand for 'K' nutrient in India is expected to grow at ~4.5% CAGR from FY09 to
FY14 to reach 4.1 Mn tons (nutrient) by FY14.
2010
The demand for complex fertilizers is expected to increase by ~7% CAGR and reach
~9.7 Mn tons (product) by FY14.
Complex fertilizer (excluding DAP) demand-supply

(Mn tons)
12
9.7
10 7% 9.3
8.6
8 7.0 7.2
6.8
0
Production Consumption
Source: Crisil, FAI
Going forward, the domestic production of other complex fertilizers is expected to

meet the domestic demand.
Potash Corp. acquisition could impact Indian govt.'s subsidy

bill
BHP Bilton's acquisition of Potash Corp. may upset the two existing potash cartels and
could lead to a change in industry dynamics.
With no domestic potash reserves, India imports potash largely as potassium chloride
at around Rs. 17,000/ ton. It offers a large subsidy on this and sells it to farmers for
Rs. 4,000/ ton. Due to India's large dependence on imports, a significant change in
global industry dynamics could impact Indian govt.'s subsidy bill. India could still try
to use its big buyer advantage and get favorable terms in changing industry scenario.

FERTILIZER INDUSTRY STRUCTURE IN INDIA
The fertilizer industry in India is mainly characterized by govt. control. Since the
fertilizer sector is of national importance, traditionally GoI has controlled the sector
2010 by regulating the investment, production, distribution and pricing. The most distinct
characteristic of Indian fertilizer sector is partial dependence on monsoons for
demand.
Ownership structure
The private sector leads in capacities in urea as well as phosphatic fertilizer sectors.
As of Nov. 2009, out of 37 plants in India with a nitrogenous fertilizer capacity of 13.1
Mn tons, 23 were in the private sector with a total capacity of 5.9 Mn tons. In case of
phosphatic fertilizers, 57% of total capacity was held by private sector.
Share of capacity of nitrogenous fertilizer Share of capacity of phosphatic fertilizer

(% share, Nov' 09) (% share, Nov' 09)
Co-
operative Co-
26% operative
35%
Private
sector
45%
Private
sector
57%
Public Public
sector sector, 8%
29%
Source: FAI
Source: FAI
Concentration
Due to the capital intensive nature of the fertilizer manufacturing projects, the
industry is relatively concentrated, where a few player capture large chunk of the
market.The share of top 5 companies in total urea production in India is ~65% and in
case of DAP it is ~84%.
Fertilizer sector % share of top 5 companies

(2009)
Urea ~65%
DAP ~84%
Complex (excluding DAP) ~80%
Source: FAI

Major Companies
IFFCO is India's largest urea manufacturing company producing ~3.2 Mn tons of urea
annually. It has urea plants in UP and Gujarat and achieved net sales of ~Rs. 5,876
crore in FY '09 for its urea division. Other prominent companies in the Indian urea 2010
industry are National Fertilizers, RCFL, KRIBHCO, Chambal Fertilizers etc.
Urea Manufacturing Companies

Company Name Capacity ('000 TPA) Sales (Rs. Cr, 2009) Location
IFFCO 4,242 5,876 Aonla, Phulpur (UP),
Kalol (Gujarat)
NFL 3,231 5,006 Vijaypur (MP), Bhatinda
(Punjab), Panipat (Haryana)
KRIBHCO 2,594 2,597 Hazira (Gujarat)
RCFL 2,037 - Trombay, Thal (Maharashtra)
CFCL 1,729 2,240 Kota (Rajasthan)
NFCL 1,195 1,800 Kakinada (AP)
Source: Crisil, Capital Line
The production, sales and location of 6 major urea manufacturers is provided in the
table above.
IFFCO is India's largest DAP manufacturer as well. It has an annual capacity of ~3.7 Mn
tons capacity. Other leading manufacturers are Godavari Fertilizers, GSFC, Tata
Chemicals etc.
Other developments
Natural Gas allocation
Govt. of India (GoI) is trying to shift all the urea manufacturing units to natural gas
based units by 2013. With the advent of RIL's KG basin natural gas and the increasing
supplies of LNG, the availability of natural gas is expected to improve.
The Govt. has allocated the initial 40 Mn metric standard cu. m per day (mmscmd) of
RIL KG basin natural gas to various units on the basis of a gas utilisation policy. The
priority has been given to fertilizer sector so as to meet their gas demand.

Gas Allocation
End users Initial Allocation Actual Allocation
(mmscmd) (mmscmd)
2010 Fertilizer plants Meet demand 15.33
Power plants 18 (Maximum) 18
City Gas Distribution 5 (Maximum) 0.87 (3.75 to steel plants)
projects
LPG making units 3 (Maximum) 3
Total 40 40.9
Source: Gas utilization policy
Subsequently, the govt. has allocated an additional 50 mmscmd gas, of which 20

mmscmd is on firm basis and additional 30 mmscmd is on fallback basis. With the
new allocation, the govt. has tried to meet the demand of the power sector.
Additional Allocation
End users Firm allocation Fallback allocation
(mmscmd) (mmscmd)
Power 12.08 12.0
Fertilizer 0.18 -
Steel 0.44 -
Refineries 5.38 6.0
Captive power plants - 10.0
CGD projects - 2.0
Source: Gas utilization policy
Oman has agreed to invest $ 3 Billion in India

Oman has agreed to invest around $3 Bn for revival of closed plants of Fertilizer
Corporation of India and Hindustan Fertilizer Corporation and expansion of Rashtriya
Chemicals and Fertilizers through Oman Oil Company.
In addition to this, both countries are also looking at ways to expand the existing
capacity of the 16.5 lakh tons urea project of the Oman India Fertilizer Company
(OMIFCO) to 25 lakh tons.

Aditya Birla Nuvo Limited (ABNL) gets preliminary nod for
capacity expansion
ABNL, earlier known as Indo Gulf Fertilizers, has received first stage environment
approval for its urea expansion project. The project envisages setting up a 2,200 tons
2010
per day (tpd) ammonia unit and a 3,850 tpd urea unit at its Jagdishpur complex in
Utter Pradesh. The complex currently has 1,910 tpd ammonia capacity and two urea
units, each of 1,625 tpd.
Outlook on Indian Fertilizer Industry

Sale of urea at IPP linked price even for Greenfield projects is expected to promote
fresh investments for Greenfield projects. The Investment Policy of 2008 has already
provided incentives for brownfield expansion and improvement in facility for existing
plants by linking the prices to IPP. In a way, GoI has rewarded all the existing Indian
urea manufacturers and also encouraged new companies to invest in the market.
Indian companies are also encouraged to invest in natural resource rich countries
overseas. The Indian govt. is ready to enter into firm offtake agreements at prices
decided by mutual consultation for such projects abroad. There is already a trend of
some Indian companies forming joint ventures abroad, like Oswal chemical and
fertilizers in Syria, and this trend will catch up with other Indian companies as well.
Availability of feedstock has been an issue for Indian fertilizer industry. Against the
industry's demand of 42 mmscmd of natural gas in FY09 , according to Fertilizer
Association of India, only 28 mscmd was available to it. That may change as big new
gas discoveries go into production. The govt. has given priority to gas based urea
plants and and these plants would be supplied gas so as to make them run at full
capacity. The govt. allocated 15.33 mmscmd of gas in this regard from RIL KG basin. In
2009, fertilizer companies started receiving natural gas supplies from the Krishna-
Godavari basin. With availability of natural gas fertilizer production is expected to
improve in India.

References
1. Fertilizer policies, The Fertilizer Association of India (FAI), retrieved on
September 13, 2010
2010
2. Fertilizer production, consumption and import statistics, FAI, retrieved on
September 13, 2010
3. Fertilizer Outlook 2010-2014, International Fertilizer Industry Association

(IFA), Annual conference, June 2010
4. Phosphate Outlook, TFI Outlook Conference, Oct 2009
5. Fertecon Phosphate report, August 2010
6. Global Supply and Demand Outlook for Fertilizers, IFA, December 2009
7. Global Fertilizers and Agricultural Chemicals, Datamonitor, February 2010
8. Newspaper articles: The Hindu, Mint, Business Standard
9. Fertilizer Annual Review , Crisil Research, January 2010
10. Gas utilization policy, Ministry of Petroleum & Natural Gas, Govt. of India
11. Annual Report 2009-10, Department of Fertilizer
12. Yara fertilizer handbook
13. PotashCorp Industry report

Pratik Kadakia (pratik.kadakia@tsmg.com), Anshul Saxena (anshul.saxena@tsmg.com) and Binay Agrawal
(binay.agrawal@tsmg.com)

Chlor Alkali
Introduction
Alkali chemicals is the oldest and the largest segment of the chemical industry. These
chemicals serve as key inputs for a number of industries such as aluminium, soap,
detergent, glass, tyre, rubber, pulp and paper, pharmaceutical, water treatment, 2010
textiles, leather, fibre etc. The key chemicals in the chlor alkali industry are
Caustic soda
l
Chlorine (including liquid chlorine)

l
Soda ash
l
Caustic Soda & Chlorine

Introduction
Caustic Soda (chemically known as sodium hydroxide) and chlorine are produced
together through the electrolysis of common salt solution (sodium chloride or brine).
Caustic soda and chlorine are generated in the ratio of 1:0.89. Demand for chlorine
drives caustic soda production globally, but in India the industry has developed in line
with the demand-supply balance of caustic soda.
There are three alternative technologies used to manufacture caustic soda from
brine. These are mercury cell, membrane cell and diaphragm technologies.
1. The membrane cell technology involves lower power costs compared to the other
two. It is also the most environmental friendly as it does not use any hazardous
materials as compared to mercury cell and diaphragm technologies which use
mercury and asbestos respectively.
2. The diaphragm technology involves higher capital and power costs. The quality of
caustic soda is also of inferior quality. However, it is popular as the purity of
chlorine from this method is highest and chlorine demand is major driver for
caustic soda production globally.
3. Mercury cell technology involves lower capital costs compared to membrane and
diaphragm technologies. However, it is not so popular because of related pollution
hazards due to use of asbestos.
Globally the diaphragm technology is the most widely used while in India the
membrane cell technology accounts for more than 90% of the total capacity.
Global Scenario
Globally the total capacity of caustic soda is estimated to be around 78.6 Mn tons in
2009. China has the highest caustic soda capacity at 27 Mn tons, accounting for 34%
of world capacity. North America has a capacity of 15.5 Mn tons. India has a capacity
of 2.9 Mn tons and accounts for 4% of the global caustic soda capacity.

Global caustic soda capacity
(78.6 Mn tons) Others
0.08
India
0.04
2010
China
Asia 34%
(excluding
India
China)
0.13
North
America
20% Europe
21%
Source: Crisil
China and Middle East are fast emerging as key production hubs for caustic soda. It is
expected that there would not be any significant capacity additions in developed
countries like North America and Western Europe primarily due to unattractive cost
structures and flat demand.
Global consumption of caustic soda in 2009 is estimated at 63.6 Mn tons. Asia is the
largest consumer of caustic soda and is expected to remain the same in near future.
Majority of caustic soda is exported from North America, the Middle East and Asia.
Australia and Latin America are the leading importers.
Consumption Mix
Caustic Soda: Global Consumption

(63.6 Mn tons, 2009)
Organics
19%
Others
26%
Water Inorganics
treatment 15%
4%
Alumina
8% Pulp &
Soaps/det Paper
ergents/tex 15%
tiles, 13%
Source: Crisil
The majority of caustic soda is used in the chemicals and paper industry. Aluminium,
textiles, soaps & detergents and water treatment are other major areas consuming
caustic soda.

Indian Scenario
Caustic Soda demand: India
(Mn tons)
6.6%
2.55 2010
2.29 2.32
2.09
1.96
1.86
Source: Crisil
Caustic soda consumption in India increased at 6.6% CAGR from FY05 to reach 2.5 Mn
tons in FY10.
Caustic Soda capacity in India 2.98

2.74 2.76
(Mn tons)
2.46
2.25 2.16 2.2 2.25
2.08 1.99
1.94
1.81

Capacity Production
Source: Crisil
Total domestic caustic soda capacity increased to 2.98 Mn tons in FY10 from 2.1 Mn
tons in FY05.

Caustic Soda: regional capacity distribution
(2.98 Mn tons, FY10)
North
15%
2010
East
West
13%
47%
South
25%
Source: AMAI, Crisil
Western region accounted for approximately 47% of the estimated capacity of 2.76
Mn tons in FY09 because of its proximity to salt which is one of the key raw materials.
The southern regions accounts for 25% of the total capacity. The northern and
eastern regions have a share of 15% and 13% respectively.
Large increase in caustic soda import in Fy10

Caustic Soda import/export
('000 tons)
370.2
Large
spike in
import
185.1
155
140.7
54.9 58.3 59 62
30.9 39 37.8
17.6

Import Export
Source: AMAI, Crisil
Imports grew rapidly at CAGR of 46.5% from 54.6 thousand tons in FY05 to 370.2
thousand tons in FY10. In FY07 and FY10 a sharp rise in import was seen. Exports
increased at a CAGR of 28.6% from 17.6 thousand tons in FY05 to 62 thousand tons in
FY10.

Major Companies
Caustic Soda: Market share of companies
(Rs. 4,560 Cr., FY09)
GACL
2010
16%
Others
39% DCM Shriram
9%
Grasim
9%
Punjab
Alkalies, 5%
ABNL Andhra
4% Sugars, 4%
ABCL Chemplast
Kanoria Sanmar, 5%
4%
Chemicals
Source: Capitaline, Crisil 5%
Gujarat Alkalies and Chemicals Ltd. (GACL) is the market leader in caustic soda
segment in India accounting for 16% of the total domestic sales value in FY09.
The Aditya Birla Group, through its companies such as Aditya Birla Chemicals Ltd
(ABCL), Grasim industries Ltd and Aditya Birla Nuvo Ltd (ABNL) capture around 16% of
domestic market. Other major companies are DCM Sriram, Grasim Industries, Punjab
Alkalies, Kanoria Chemicals and Andhra Sugars. The top five companies account for
almost 45% of the total domestic sales of caustic soda in India.
Key Applications
Caustic Soda: India Consumption
(2.3 Mn tons, FY09)
Pharma
6%
Textiles
13%
Others
40%
Alumina
17%
Soaps/det
ergents
9% Pulp &
Paper
Source: AMAI, Crisil 16%
The key end user industries of caustic soda in India are textiles, paper, soaps and
detergents and aluminium. Alumina is the largest end-use industry accounting for
17% of the total caustic soda consumption in FY09. Caustic soda is used in processing
of bauxite ore in the aluminium industry. The processing of bauxite ore gives alumina
which is in turn used in the manufacturing of aluminium. Paper and textiles

accounted for 16% and 13% respectively of total caustic soda consumption in FY09. In
the paper industry it is used in water treatment, de-inking of waste paper and as a
raw material in pulping and bleaching processes. In the textile industry, caustic soda is
used in processing of cotton fibers and bleaching of fabrics.
2010
Chlorine Consumption
Global Scenario
Global consumption of chlorine in 2009 is estimated at 55.4 Mn tons. Chlorine is used
in manufacture of paper and pulp, ethylene dichloride (EDC), which is used for
producing polyvinyl chloride (PVC), manufacture of chlorinated paraffin wax,
fertilizers and pesticides.
Indian Scenario
Chlorine: Global Consumption Chlorine: India Consumption
(55.4 Mn tons, 2009) Organics (1.9 Mn tons, FY09)
20% Others Organics
13% 20%
Others Pesticides
30% Chlor.Inter
6% 5%
Water
Vinyls Chlor.Inter
treatment
18% 11%
4%
Inorganics
2% Water
Pulp and Pulp and treatment
Vinyls Paper, 2% Paper, 8% Inorganics 2%
36% 23%
Source: Crisil Source: AMAI, Crisil
Consumption of chlorine in India in FY09 is estimated at 1.9 Mn tons. The key end-
user industries of chlorine in India are PVC, inorganic and organic chemicals. Vinyl, a
key determinant of chlorine demand in India, accounted for 18% of total chlorine
demand.
Caustic soda and chlorine capacity are correlated

Since caustic soda and chlorine are co-products capacities and production of caustic
soda and chlorine are correlated. Chlorine production has been growing in line with
the growth of caustic soda manufacturing and has not been determined by the
growth of the chlorine-based downstream industries. There is more chlorine
produced in India than there is demand.
Like caustic soda, chlorine capacity also increased at a CAGR of 7.5% from 1.9 Mn
tons in FY05 to 2.7 Mn tons in Fy10. Production also increased at 4.4% CAGR from 1.6
thousand tons in FY05 to 2 Mn tons in Fy10.

Industry Outlook
Demand for caustic soda from end-use industry
Industry CAGR over next 5 years
Alumina 17-18 2010
Paper 4-5
Soaps/detergents 3-4
Textiles 4-5
Source: Crisil, Tata Strategic Analysis
Demand for caustic soda is expected to be driven mainly by growth in end use
industry i.e. alumina, paper, detergent and textiles. Domestic alumina production is
likely to more than double to 10.5 Mn tons from current production of 4 Mn tons.
Strong growth in industrial, infrastructure, automobile, transportation and power
sectors would drive the demand for alumina. Demand for caustic soda from both
paper and textile industry is expected to grow at ~5% whereas demand from
detergent industry is expected to grow at ~4% in next 5 years.
Demand supply forecast

Driven by end use industry growth, demand for caustic soda is projected to grow at a
rate of 7.3% from 2.55 Mn tons in FY10 to 3.6 Mn tons in FY15.
Imports are projected to reach 611.2 thousand tons in FY15 from 370 thousand tons
in FY10. This is due to the projected demand-supply gap in the industry.
The increase in capacity is expected to be driven by companies like GACL, which is
slated to add caustic soda capacity of about 200 thousand tons at its Dahej facility.
Trend in caustic soda demand-supply scenario
('000 Tons)
4,000 1000
3,631
3,499
3,500 3,302 900
2,901 800
3,000
2,550 2,663
700
2,500
600
2,000 611 500
565 588
1,500 400
471
392 300
1,000 370
200
500
100
0 0
production consumption import (RHS)
Source: Crisil, Tata Strategic

Other expansions coming up are of about 112.5 thousand tons by Reliance Industries
Ltd. and 75 thousand tons by Kanoria Chemicals. Aditya Birla Chemicals Ltd. is setting
up two Greenfield projects with a combined capacity of ~90 thousand tons.
2010 SODA ASH

Introduction
Soda ash is chemically known as sodium carbonate. Broadly there are two ways in
which soda ash is produced; it is either manufactured synthetically from salt or is
obtained from refining of naturally available mineral, trona, or naturally occurring
sodium carbonate-bearing brines. Globally, approximately 75% of soda ash is
produced from the synthetic process.
Processing costs of soda ash from naturally available sources is less than the
manufacturing costs of producing soda ash synthetically, thereby making the naturally
available soda ash less expensive.
There are three main processes to manufacture soda ash from salt.
1. Standard Solvay Process: The standard solvay process is characterised with low
salt utilisation and requirement of good quality of limestone and coke. This
process, compared to other two processes, generates larger amount of effluents
and hence require good disposal facilities
2. Modified Solvay Process: The modified solvay process has better salt utilization
and requirement of limestone is less. But the process requires very high quality of
salt without any impurities and ammonia requirement is also high.
3. Dry Liming Process: The raw material consumption is low in the dry liming
process and it has a perfect steam power balance.
All the three processes are used in India and have their own advantages and
disadvantages.
Global scenario
Worldwide consumption of soda ash is estimated at 41 Mn tons in FY09. Natural and
Synthetic are two methods of soda ash production. From a total production 45.9 Mn
tons, natural soda ash accounted for 11.7 Mn tons in Fy09.
Soda Ash: Global production method

(% share, FY09)
Natural
25%
Synthetic
Source: USGS, Crisil 75%

The US accounts for over 92.3% of global natural soda ash production of 11.7 Mn
tons. The country has world's largest trona deposit in the Green River basin.
Botswan Others
a, 2% 1%
Kenya
4% 2010
Source: USGS, Crisil US, 94%
The global soda ash capacity is estimated to be 55 Mn tons in FY09. China and US are
the biggest soda ash producing countries accounting for 40% and 20.5% of the total
global soda ash capacity respectively. India accounts for 5.2% of the total global
capacity.
Consumption Mix
Globally the majority of soda ash is used in the glass industry which accounts for 50%
of the global soda ash consumption. Chemicals and detergents are other major end
uses, accounting for 10% and 15% of global soda ash consumption respectively. Soda
ash can also replace caustic soda in certain industries like pulp and paper, water
treatment and certain sectors in chemicals.
Soda Ash: Global consumption mix

(% share, FY09)
Others
25%
Glass
Chemicals 50%
10%
Detergent
Source: Crisil 15%
Indian Scenario
The Indian inorganic chemical industry produces two varieties of soda ash: light soda
ash (that is used in the detergent industry) and dense soda ash (that is used in the
glass industry). Light soda ash has a share of 70% and dense soda ash has a share of
30% in total soda ash production.

2.51
Soda Ash demand in India

(Mn tons) 2.35
2010 3%
2.27
2.18
2.16 2.15

Source: Crisil
Total domestic soda ash consumption grew at 3% CAGR from FY05, to reach 2.51 Mn
tons in FY10.
600
Exports and imports of soda ash

('000 tons)
421
395
369
284
253
208
185 182 186
145 159
FY05 FY06 FY07 FY08 Fy09 FY10

Source: AMAI, Crisil Export Import
The imports for soda ash have been increasing over the years and stand at 600
thousand tons in FY10 compared to 185 thousand tons in FY05. The soda ash exports
exhibit a fluctuating trend.
The total operational capacity of soda ash in FY09 is estimated to be around 2.87 Mn
tons. Salt is the main raw material for soda ash production. The Indian soda ash
industry is concentrated in Gujarat due to the proximity to and easy availability of
inputs like limestone and salt.
Companies
Tata Chemicals is the market leader in soda ash sales in India accounting for 30% of
the market in FY09. The top four companies account for around 84% of the total
domestic sales of soda ash in India.
Tata Chemicals is also the world's second-largest producer of soda ash with a total
capacity of 5 million tons per annum of which more than 60% is attributed to natural
soda ash.

Soda Ash: Domestic companies
(Sales market share, FY'09)
Others
13%
DCW
3%
Tata 2010
Chemicals
Saurashtra 30%
Chemicals
10%
Nirma
18% GHCL
26% Source: AMAI
Domestic Consumption Mix

The consumption mix of soda ash in India differs significantly from the global mix. In
FY09, detergent accounted for largest share of soda ash consumption at 33%,
followed by glass at 27%.
Soda Ash: Domestic consumption mix
(%, FY'09)
Glass
27%
Others
40%
Detergent
33% Source: Crisil
Industry Outlook
The domestic consumption of soda ash is expected to increase at a rate of 4.2%
between FY10 and FY15. The domestic consumption is expected to be driven by the
end-user industries like detergents and glass. Demand from detergents industry is
expected to grow at a moderate rate of 3-4% between FY10 and FY15. The glass
industry is driven by the construction and automobile sector. Both these sectors are
expected to witness a high growth between FY10 and FY15. Demand from the glass
industry is expected to witness a growth rate of 11-12% between FY10 and FY15. This
would increase the consumption share of glass as well.
Demand growth from end-use industry
Industry CAGR over next 5 years
Detergent 3-4
Glass 11-12
Others 1.5-2
Source: Crisil, Tata Strategic Analysis

Demand supply forecast
The total capacity of soda ash in India is expected to increase from 2.95 Mn tons in
FY10 to 3.09 Mn tons in FY15. The expected production from these capacities would
2010 not be able to meet the increasing demand. The production is expected to reach 2.7
Mn tons in FY15 from current level of 2.2 Mn tons. So it is expected that import will
remain at high level and expected to increase to ~635 thousand tons in FY15, driven
by captive imports by domestic producers.
Trend in soda ash demand-supply scenario
('000 tons)
4,000 1000
3,500 900
2,964 3,085
2,736 2,847 800
3,000 2,633
2,509 700
2,500 600
2,000 635 500
544 588
1,500 600 504 400
480
300
1,000
200
500 100
0 0
production consumption import (RHS)
Source: Tata Strategic analysis, Crisil
Domestic producers face threat of cheap imports from China. In November 2009, in
order to safeguard domestic producers from market disruptions caused by the
increased imports from China, Govt. of India imposed a 20 percent anti-dumping duty
on soda ash imports from China, which is expected to continue till imports normalize.
This is likely to help domestic producers to hold on to prices and increase their
production to meet domestic demand.
References
1. Inorganic Chemicals, IBEF, April 2010
2. Chlor Alkali Outlook, Alkali Manufacturer's Association of India, retrieved on
September 16, 2010
3. Caustic Soda Information, Indian Chemical Portal, retrieved on September 18,
2010
4. Soda Ash Statistics and Information, US Geological Survey, retrieved on
September 18, 2010
5. Newspaper articles: The Hindu, Mint, Business Standard
6. Chlor Alkali Annual Review , Crisil Research, January 2010

Pratik Kadakia (pratik.kadakia@tsmg.com), Anshul Saxena (anshul.saxena@tsmg.com) and Binay Agrawal
(binay.agrawal@tsmg.com)

Pharmaceuticals
Global Pharmaceutical Market Overview
The global pharmaceutical market was estimated at ~ USD 837 Bn in 2009 with 8%
growth over 2008. The developed markets, which have been the traditional
stronghold of innovator companies are expected to witness lower than historical 2010
growth going forward. Higher R&D costs, relatively dry pipeline for new drugs,
increasing penetration of generics and pressure from governments for reduced
healthcare costs are putting a lot of pressure on global pharmaceutical companies,
Future growth is expected to be primarily driven by generics and emerging markets.
The global pharmaceutical market is expected to grow at 6% CAGR to reach USD
1,100 Bn in 2014.
Global pharma sales 1,100
(USD Bn) 6%
837
9%
499
2003 2009 2014

Source: IMS Health, Crisil Research, Tata Strategic Estimates
The top 10 players account for over 42% of total global sales. Pfizer is the market
leader, followed by GSK and Novartis AG. Lipitor is the largest selling drug followed by
Plavix and Nexium. Oncology continues to be the leading therapy class globally
followed by Lipid regulators.
Global Top 10 Pharmaceutical Companies

Rank Company 2008 Rev. (USD Bn) Market share (%)
1 Pfizer 43.4 6.0
2 Glaxo SmithKline 36.5 5.0
3 Novartis AG 36.2 5.0
4 Sanofi-Aventis 35.6 4.9
5 Astra Zeneca 32.5 4.5
6 Roche 30.3 4.2
7 Johson & Johnson 29.4 4.1
8 Merck & Co 26.2 3.6
9 Abbott 19.5 2.7
10 Eli Lilly 19.1 2.6
Total Top 10 308.8 42.6
Source: IMS Health

Global Top 10 Drugs
Rank Drugs 2008 Rev. (USD Bn) Market share (%)
1 Lipitor 13.7 1.8
2010 2 Plavix 8.6 1.1
3 Nexium 7.8 1.0
4 Seretide/ Advair 7.7 1.0
5 Enbrel 5.7 0.7
6 Seroquel 5.4 0.7
7 Zyprexa 5.0 0.6
8 Remicade 4.9 0.6
9 Singulair 4.7 0.6
10 Lovenox 4.4 0.6
Total leading brands 68.0 8.8
Source: IMS Health
Global Top 10 therapy classes

Rank Therapeutic Segment 2008 Rev. (USD Bn) Market share (%)
1 Oncology 48.2 6.2
2 Lipid regulators 33.8 4.4
3 Respiratory 31.3 4.0
4 Anti-diabetics 27.3 3.5
5 Acid pump inhibitors 26.5 3.4
6 Anti-psychotics 22.9 3.0
7 Angiotensin-II antagonists 22.9 3.0
8 Anti-depressants 20.3 2.6
9 Anti-epileptics 16.9 2.2
10 Auto-immune agents 15.9 2.1
Total leading brands 266.0 34.4
Source: IMS Health
Indian Pharmaceutical Market Overview

The Indian pharmaceutical industry is ranked 3rd in the world in terms of production
volume and 14th in terms of domestic consumption value. The Indian pharmaceutical
industry was estimated at USD 19.4 Bn in FY09. Formulations account for ~65% and
bulk drugs for the balance 35% in value terms. The industry is expected to reach USD
43.8 Bn in FY14. Bulk drug exports are expected to grow the fastest at ~35% followed
by formulation exports at ~25%. The domestic formulation market is expected to
grow at ~11% with key growth drivers being increased per capita spend on
pharmaceuticals, improved medical infrastructure, greater health insurance
penetration and increasing prevalence of lifestyle diseases.

In 2008 the domestic formulation market contributed only 1% in value terms to the
global pharmaceutical market, mainly due to lower drug penetration and lower prices
compared to developed markets.
43.8 2010
India pharma industry
(USD Bn)
18%
19.4
21%
7.6
FY04 FY09 FY14

Source: IMS Health, Crisil Research, Tata Strategic Estimates
Today the Indian pharmaceutical sector meets 95% of the country's medical needs.
The Indian pharmaceutical industry consists of both domestic companies and
subsidiaries of multinational corporations. Indian companies manufacture a wide
range of generic drugs (branded and non-branded), intermediates and bulk
drugs/Active Pharmaceutical Ingredients (API).
Regulatory System
The Indian pharmaceutical industry is mainly regulated on patents, price and quality.
Until 2004, the regulatory system in India focused only on process patents. The
process patent regime helped domestic players develop innovative process
development capabilities while making it unattractive for MNC players to operate.
The process patent regime and the DPCO (Drug Price Control Order - which regulated
the import, manufacture, distribution and sale of drugs in India) introduced by the
Indian government in 1970 gave a much needed boost to the Indian pharmaceutical
industry. Indian companies flourished during this phase by re-engineering drugs of
global pharmaceutical players and launching them in India. Indian companies gained
process chemistry skills, but did not focus on research & development for new drug
discoveries. In January 2005, India complied with WTO to follow the product patent
regime. The Act allowed for only two types of generic drugs in the Indian market: off-
patent generic drugs and generic versions of drugs patented before 1995. The

Amendment grants new patent holders a 20-year monopoly starting on the date the
patent was filed and no generic copies can be sold during the duration of the patent.
The Drug Price Control Order (DPCO) fixes the ceiling price of some APIs and
formulations.
2010
Evolution of Indian Pharmaceutical Industry
Product patents recognized

MNC dominated
1970 Government sets up Hindustan Antibiotics and Indian Drugs and
Pharmaceuticals Ltd.
Indian Patent Act 1970: Process patent regime established
Drug Price Control Order 1970: All formulations and bulk drugs
bought under price control
1991 1991: Liberalization
Tariff barriers reduced
FERA relaxed
DPCO amended 1995: drugs under control reduced from 146 to 74
2005 Product patents recognized
MNCs start launching patented drugs
Proposed Pharmaceutical Policy 2007: intends to bring 200 essential
drugs under DPCO
New policy likely to allow MAPE of 150% with additional 50% margin
for companies that invest in new drug research
Source: Crisil research
Indian Formulations Industry

Formulations are broadly categorized into patented drugs and generic drugs. A
patented drug is an innovative formulation that is patented for a period of time
(usually 20 years) from the date of its approval. A generic drug is a copy of an expired
patented drug that is similar in dosage, safety, strength, method of consumption,
performance and intended use. Patented drugs are usually imported while most of
the generic drugs are manufactured domestically. Absence of patent protection until
2005 and low average disposable incomes coupled with relatively low penetration of
health insurance leading to unwillingness of local pharmaceutical companies to make
major investments in R&D resulted in the industry's focus on generic products rather
than innovative patented products.
The Indian formulations market is estimated to be USD 12.6 Bn in FY09 comprising of
domestic consumption of USD 7.6 Bn and exports of USD 5 Bn The formulations
market is expected to grow at 17% CAGR to reach USD 25.6 Bn in FY14. Over 40% of
total formulations exports from India is to regulated markets and this split is expected
to continue at the same levels going forward.
Over the last 30 years, India's pharmaceutical industry has evolved from being a
marginal global player to becoming a world leader in the production of high quality
generic drugs. India exports pharmaceutical products to more than 200 countries,

primarily the United States, Russia, China and the United Kingdom. India's single
largest export market continues to be the United States, the world's largest generic
drug market. ~95% of India's drug market in volume terms consists of second-and-
third generation drugs no longer subject to patent protection in the developed world.
25.7
2010
India formulations market
(USD Bn)
15%
10.7
12.6
16%
5
6.1
15
1.6
7.6
4.5
FY04 FY09 FY14

Domestic formulation market Formulation exports
Source: Crisil Research, Tata Strategic Estimates
Generic drugs are 40-75% lower in costs as compared to patented drugs. Low
production costs and large talent pool give India a clear edge over other nations. In
recent years, Indian pharmaceutical companies have invested substantial part of their
total global investment in generic manufacturing capacity. Indian firms now account
for over 30% of all US Abbreviated New Drug Application (ANDA) filings submitted to
the FDA. India also has the largest number of US FDA approved manufacturing sites
outside the US.
31.3
India ANDA approvals
27.9
(% of total)
24.1
19.5
14.2
9.1
6.6 6.8
6.0
2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: US FDA, Crisil Research

ANDA approvals (approved and tentative) received by
Indian players 131
121
2010 96
72
58
49
42
38 39
35
24 26
21
14 12
8 10
2
2001 2002 2003 2004 2005 2006 2007 2008 2009
Tentative Approved
Source: US FDA, Crisil Research
The formulations industry is highly fragmented with ~400 units in the organized
sector and ~15,000 units in the unorganized sector. The industry has a range of over
100,000 drugs spanning various therapeutic segments. Domestic companies
dominate the formulations market with 7 Indian companies amongst the top 10
companies. The top 5 companies in formulations account for over 22%, while the top
10 accounted for over 36% of the domestic formulations market. Cipla was the largest
Indian drug manufacturer based on FY09 revenues followed by Ranbaxy and GSK.
India top 10 pharmaceutical companies based on formulation sales

Rank Company Market share (%)
1 Cipla 5.2
2 Ranbaxy 5.0
3 GSK 4.7
4 Cadila Healthcare 3.8
5 Piramal Healthcare 3.7
Sun Pharma 3.3
7 Alkem 3.1
8 Lupin labs 2.7
9 Pfizer 2.6
10 Dr. Reddy's 2.4
Total Top 10 36.5
Source: ORG IMS, Crisil Research
Manufacturing operations are largely concentrated in West and South India, primarily
Maharshtra, Gujarat and Andhra Pradesh. However, many players have shifted
manufacturing base to excise free zones in the North, such as Baddi, Haridwar and
Sikkim, due to shift towards MRP (maximum retail price)-based excise duty levy.
In India, ~ 70% of the total formulations sold are for acute illness (short duration) and
remaining for chronic illness (prolonged duration). This is true for most developing
countries as compared to developed markets where the growth is led by chronic
ailments.

Growth in India has been primarily driven by high growth segments such as cardiac,
anti-diabetic, gynaecology, anti-infectives and gastrointestinal. Going forward, sales of
drugs for chronic segments are expected to increase due to increasing stress levels
and higher prevalence of lifestyle diseases. The acute segments are however also
expected to exhibit steady growth due to hygiene issues as well as its predominance 2010
in rural areas. Currently, the tier 2 cities and rural markets account for ~40% of the
total market and are expected to drive the growth in future.
Leading Therapeutic Segments in India

Therapeutic Segments FY09 Sales % share of total
(Rs. Cr.) demand
Anti-infectives 6,290 18
Cardio Vascular 3,950 11
Gastrointestinal 3,830 11
Respiratory 3,110 9
Pain/ Analgesics 3,080 9
Vitaomins/ Nutrients 2,760 8
Gynaecological 2,040 6
Dermatology 1,930 5
Central Nervous System 1,930 5
Anti-diabetic 1,860 5
Top 10 Therapeutic Categories 30,770 87
Total Domestic Formulation Demand 35,370 100
Source: ORG IMS, Crisil Research
In FY09, leading drug classes by size were cephalosporins, anti-rheumatic non-

steroidal, anti-peptic ulcerants, oral anti-diabetics and ampicillin/ amoxycillin, which
together accounted for over 20% of the total market share.
Indian Bulk Drugs Industry

Bulk drugs/ APIs are the key ingredients for making formulations. Bulk drug exports
account for ~90% of bulk drug production in India.
India bulk drug exports 18.3
(USD Bn)
22%
6.7
35%
1.5
FY04 FY09 FY14

Source: Crisil Research, Tata Strategic Estimates

Bulk drug exports from India have grown from ~USD 1.5 Bn in FY04 to ~USD 6.7 Bn in
FY09 at a CAGR of ~35%. ~90% of bulk drugs manufactured in India cater to the
export markets. Majority of the growth is expected to be from the rising exports to
regulated markets like USA, Europe and Japan.
2010 The share of API exports to innovator companies in regulated markets is expected to
increase from 8% of total exports in FY09 to 17% by FY14. This rise is expected to be
driven by the stronger patent safeguards being adopted by India and increasing
confidence of foreign players in the Indian regulatory framework and technical
capabilities.
API exports from India (FY09) API exports from India (FY14)
(USD 6.7 Bn) (USD 18.1 Bn)
Semi-
regulated,
Regulated, Generics:
Semi- Generics:
35% 48%
49% 41%
regulated,
51% Regulated,
Innovators: 65% Innovators:
8% 17%
Source:Crisil Research Source: Crisil Research
The technical competence of Indian manufacturers compared to other nations can be

gauged by the number of Drug Master Files (DMFs) filed. Over the period 2000 to
2009 India has filed the largest number of DMFs (over 2,000) as compared to various
competing countries like China and Italy. Nearly 50% of all DMFs filed in 2009 (till
October) are from India. In 2009 alone (till October), India filed over 270 DMFs,
compared to 60 by China.
Country-wise cumulative DMF filings: 2000-09
2,016
575
401
187 167 121 99 69 13
India China Italy Japan Spain Israel France Mexico Brazil
Source: Crisil Research
Government Initiatives
The government of India has undertaken several policy initiatives and tax breaks for
the growth of the pharmaceutical business in India. Some of the measures adopted
are:
l Pharmaceutical units are eligible for weighted tax reduction at 200% for the
research and development expenditure obtained
l Two new schemes namely, New Millennium Indian Technology Leadership
Initiative and the Drugs and Pharmaceuticals Research Program have been
launched by the Government in 2009
l The Government is contemplating the creation of special purpose vehicles (SPV)
with an insurance cover to be used for funding new drug research
l The Department of Pharmaceuticals is mulling the creation of drug research
facilities which can be used by private companies for research work on rent

Contract Research & Manufacturing (crams)
Declining R&D productivity of global pharma majors has led to increased cost of
developing new drugs. Globally USD 130 Bn worth of drugs are expected to come off
patent by 2013. All these factors have led to pressure on margins of both innovator 2010
and generic companies resulting in increased outsourcing decisions. This provides a
good opportunity for CRAMS companies to provide a wide range of services from
research to manufacturing. Critical factors considered by a global pharmaceutical
company in selecting an outsourcing partner range from cost, good manufacturing
practice (GMP) facilities, quality, availability, references, relationships, timeliness to
confidentiality/ IP protection.
PHARMA INDUSTRY VALUE CHAIN TYPICAL
VALUE CHAIN
Drug Discovery Marketing &

Development Manufacturing
(Research) Sales
Target Identification Pre Clinical Trials Basic Chemicals Packaging

STAGES
Validation Phase I Intermediates Logistics
Screening Phase II & III API/ Bulk Drugs

Over the Counter
(OTC)/ Prescription
Optimization Phase IV Formulations
CHALLENGES
Approval/ Site Sales

Patent
Preview Certification Channels
Source: Tata Strategic Analysis, Duke University
Contract research essentially involves supporting the innovator companies in their

drug discovery research and development. Drug discovery research comprises of
target identification, validation, screening and optimization. Drug development
involves Pre clinical trials, Phase I clinical trials, Phase II clinical trials and Phase III
clinical trials. Contract manufacturing could be for manufacturing APIs or finished
dosages for both patented and generic drugs.
CRAMS in India has been growing at a rapid pace in India in the last few years and
emergence of newer entrants has kept the momentum going. Increasingly there is
now a rising trend of overseas investments by Indian companies, driven by access to
new markets or technology, increasing product portfolio or completing the service
offerings across the entire CRAMS value chain. Most acquisitions in US/ Europe have
been for leveraging existing client relationships of target companies or access to
markets or technology while acquisitions in China have been for securing access to
low cost intermediates or basic APIs.
Major CRAMS companies include Nicholas Piramal, Divi's Laboratories, Jubilant
Organosys, Dishman Pharmaceuticals, Torrent Pharmaceuticals and Zydus Cadilla.
Most of these players are present in contract manufacturing of both APIs and finished
dosages as well as in contract research.
OUTLOOK
Large domestic market, low cost manufacturing and increasing acceptance for IP
make India a promising destination for global pharmaceutical companies. Acquisition
of Indian generic majors by leading global innovator and generic companies to
increase India presence and leverage cost effectiveness of Indian manufacturing
operations is increasingly expected. Extensive distribution and sales force network of
Indian companies make them attractive partners for global research focused
companies.

MNC outsourcing deals with Indian companies
Indian company MNC partner Deal type Year
Piramal Healthcare AstraZeneca Several APIs 2005
2010 Allergan 2 APIs 2005
Pfizer Few APIs 2008
Divi's Labs Abbot Labs n.a. 2005
GSK 2 APIs 2007
Merck & Co. 1 API n.a.
Dishman Solvay 4 APIs 2007
Aztrazeneca 2 APIs 2009
GSK Few APIs 2009
Shashun Chemicals GSK 1 API 2008
Eli Lilly 1 API n.a.
Cadila Healthcare Nycomed 1 API 2004
Wyeth 1 API 2008
Aurobindo Pharma Pfizer Several APIs 2010
Source: Crisil Research
In a post product-patent scenario, Indian companies will have to increasingly look at

strategic alliances, investments, mergers, acquisitions or divestitures to improve their
product portfolio to retain or improve their relative market share. In order to stay
competitive and build future capabilities, domestic companies will have to invest in
R&D.
Indian pharma companies need to accelerate the transition from reverse engineering
of generic drugs to development of new molecules. The Indian industry needs to
develop and improve its capabilities in novel drugs and delivery mechanisms.
Domestic companies should continue to focus on innovation to develop NCEs/ NMEs
(new chemical entities/ new molecular entities) which will offer sustainable revenues
going forward. Increasing collaboration with global pharma companies could help in
sharing costs and risks, while improving capability and ensuring better results. In-
licensing/ out-licensing is an area that should continue to be actively pursued
wherever relevant.
The current environment throws up several opportunities for pharmaceutical
companies, both in their home turf as well as export markets. Leading Indian
companies are in a strong position to take advantage of the fundamental changes the
industry is going through and emerge much stronger in the future with larger global
presence.
References:
1. Pharmaceutical Report 2010, Crisil
2. Pharmaceutical Report 2010, IMS Health
3. Its 'India Calling' for global pharma companies: PWC report 2010, Express Pharma
article
4. Indian Pharmaceutical Sector presentation 2008, IBEF

Pratik Kadakia (pratik.kadakia@tsmg.com), Jeffry Jacob (jeffry.jacob@tsmg.com) and Siddhartha Gondal
(siddhartha.gondal@tsmg.com)

Agrochemicals
Introduction
Agrochemicals or pesticides are chemical substances used to control or kill pests,
unwanted plants or animals that may harm or damage the crops. Agrochemicals can
be classified into the following key segments: 2010
1. Insecticides
2. Herbicides/ Weedicides
3. Fungicides
4. Bio-pesticides
5. Others (Nematocides, Rodenticides etc.)
Global Agrochemicals Industry

Global agrochemical industry has grown strongly at ~9% p.a. since 2001 to reach
~USD 51.2 Bn in 2009.
Global market Size 51.2

(USD Bn)
9%
25.8
2001 2009
Source: BCC Research, Tata Strategic Estimates
Europe is the biggest market for agrochemicals with ~32% share in 2008. Globally,
herbicides are the largest consumed agrochemical followed by insecticides. Top 6
companies account for ~70% of total market.
Global Geographical share: 2008

(%)
Middle East &
Africa, 3.80%
North America
Europe
20.60%
31.70%
Latin America Asia

20.80% 23.10%

INDIAN AGROCHEMICALS INDUSTRY
Industry Overview
2010 India is the fourth largest producer of agrochemicals globally, after United States,
Japan and China. The agrochemicals industry is a significant industry for the Indian
economy. The Indian agrochemicals market grew at a rate of 11% from USD 1.22
billion in FY08 to an estimated USD 1.36 billion in Fy09.
State-wise consumption: FY09
(% of total)
Andhra Pradesh
Others 24%
30%
MP & Maharashtra,
Chattisgarh, 13%
8%
Gujarat Punjab
7% Karnataka, 11%
7%
Total: USD 1.36 Bn
India's agrochemicals consumption is one of the lowest in the world with per hectare
consumption of just 0.58 Kg compared to US (4.5 Kg/ha) and Japan (11 Kg/ha). In
India, paddy accounts for the maximum share of pesticide consumption, around 28%,
followed by cotton (20%).
Per capita consumption: FY09
(Kg/ ha)
17
13
12
7 7
5 5
0.6
Taiwan China Japan USA Korea France UK India

Industry Structure
In India, there are about 125 technical grade manufacturers (10
multinationals), 800 formulators, over 145,000 distributors. 60 technical grade
pesticides are being manufactured indigenously.

Industry Structure
Raw Technical Grade

Materia Manufacturer
Supplierl 2010
Formulator
End Distributor/
User Retailer
Technical grade manufacturers sell high purity chemicals in bulk (generally in drums
of 200-250 Kg) to formulators. Formulators, in turn, prepare formulations by adding
inert carriers, solvents, surface active agents, deodorants etc. These formulations are
packed for retail sale and bought by the farmers.
Agrochemicals installed capacity & production

(000' tons)
148
145 146 146
82 85 83 85
FY06 FY07 FY08 FY09

Capacity Production
Source: Ministry of Chemicals & Fertilizers
The Indian agrochemicals market is characterized by low capacity utilization. The total
installed capacity in FY09 was 146,000 tons and total production was 85,000 tons
leading to a low capacity utilization of 58%. The industry suffers from high inventory
(owing to seasonal & irregular demand on account of monsoons) and long credit
periods to farmers, thus making operations 'working capital' intensive.
India due to its inherent strength of low-cost manufacturing and qualified low-cost
manpower is a net exporter of pesticides to countries such as USA and some
European & African countries. Exports formed ~50% of total industry turnover in FY08
and have achieved a Compounded Annual Growth Rate (CAGR) of 29% from FY04 to
FY08.

Key Segments
Agrochemicals market: Product share
(% of total)
2010 1%
16%
5%
20%
14%
20%
69% 55%
FY04 FY09
Insecticides Herbicides
Fungicides Biopesticides & others
Insecticides: Insecticides are used to ward off or kill insects. Consumption of

insecticides for cotton has come down to 50% from 63% of total volume after
introduction of BT cotton.
Fungicides: Fungicides are used to control disease attacks on crops. The growing
horticulture market in India owing to the government support has given a boost to
fungicide usage. The market share of fungicides has increased from 16% in 2004 to
20% in 2009.
Herbicides: Herbicides are the fastest growing segment of agrochemicals. Their main
competition is cheap labor which is employed to manually pull out weeds. Sales are
seasonal, owing to the fact that weeds flourish in damp, warm weather and die in
cold spells.
Bio-pesticides: Bio-pesticides are pesticides derived from natural substances like
animals, plants, bacteria and certain minerals. Currently a small segment, bio-
pesticides market is expected to grow in the future owing to government support and
increasing awareness about use of non-toxic, environment friendly pesticides.
Others: Plant growth regulators, Nematocides, Rodenticides, Fumigants etc.

Rodenticides and plant growth regulators are the stars of this segment.
Segment Major Products Main Applications
Insecticides Acephate, Monocrotophos, Cotton, Rice

Cypermethrin
Fungicides Mancozeb, Copper Oxychloride, Fruits, Vegetables,
Ziram Rice
Herbicides Glyphosate, Isoproturon, 2,4-D Rice, Wheat
Bio- Spinosyns, neem-based Rice, Maize,
pesticides Tobacco
Others Zinc Phosphide Aluminium Stored produce
Phosphide

Competitive Landscape
The Indian agrochemicals market is highly fragmented in nature with over 800
formulators. The competition is fierce with large number of organized sector players
and significant share of spurious pesticides. The market has been witnessing mergers 2010
and acquisitions with large players buying out small manufacturers.
Key market participants include United Phosphorus Ltd, Bayer Cropscience Ltd, Rallis
India Ltd, Gharda Chemicals Ltd, Syngenta India Ltd, BASF India Ltd, etc. Top ten
companies control almost 80% of the market share. The market share of large players
depends primarily on product portfolio and introduction of new molecules. Strategic
alliances with competitors are common to reduce risks and serve a wider customer
base.
Brief Profile of key companies

United Phosphorous Ltd. (UPL)
Sales (FY10) Rs.1,753 Cr. (Crop protection)
Key Brands Insecticide: Viraat
Herbicide: Devrinol, Orrja
Fungicide: Saafe, Zeemil
Production Capacity Pesticides: 91,000 tons per annum
Intermediates: 41,000 tons per annum
Bayer CropScience Ltd.

Sales (FY10) Rs.1,624 Cr.
Key Brands Fungicide: Antracol, Folicur
Insecticide: Confidor, Calypso
Herbicide: Atlantis, Topstar
Production Capacity Active ingredients: 6,300 tons per annum
Powder formulations: 7,650 tons per annum
Liquid formulations: 10,000 KL per annum
Rallis India Ltd.

Sales (FY10) Rs.874 Cr.
Key Brands Fungicide: Contaf, Contaf Plus, Master
Insecticide: Rogor, Daksh, Tata Mida
Herbicide: Fateh, Tata Metri
Production Capacity Pesticides: 10,000 tons per annum
Formulations: 30,000 Litre per annum

Key Trends
Market Trends
Focus on developing environmentally safe pesticides by the industry as well as
l
2010 the Government. The Department of Chemicals has initiated a nationwide
programme for "Development and production of neem products as Environment
Friendly Pesticides" with financial assistance from United Nations Development
Programme (UNDP).
Focus by larger companies on brand building by conducting awareness camps for
l
farmers and providing complete solutions.
Increase in strategic alliances among large players for greater market reach and
l
acquisitions of smaller companies globally to diversify product portfolio. For
example: Rallis has a marketing alliance for key products with FMC, Dupont,
Syngenta, Bayer and Nihon Nohayaku. In addition, UPL has had a series of small
acquisitions globally to enter new geographies and gain product expertise.
Technology Trends
Increased R&D expected for development of new molecules and low dosage, high
l
potency molecules
Focus on R&D in bio-pesticides segment with increasing preference for
l
environmentally safe products in the market

Since the Indian agricultural sector is highly dependent on monsoons, the market for
agrochemicals is expected to grow at a conservative growth rate of 7.5% to reach ~
USD 1.95 Bn by FY14. Key market drivers include:
1. Growth in demand for food grains: India has 16% of the world's population and
less than 2% of the total landmass. Increasing population and high emphasis on
achieving food grain self-sufficiency as highlighted in the FY10 budget, is expected
to drive growth.
2. Limited farmland availability and growing exports: India has ~190 Mn hectares
of gross cultivated area and the scope for bringing new areas under cultivation is
severely limited. Available arable land per capita has been reducing globally and
is expected to reduce further. The pressure is therefore to increase yield per
hectare which can be
achieved through increased World - Available arable land per capita (Ha)
usage of agrochemicals. 0.27
Indian agrochemical
exports accounted for 0.15
~50% of total industry size
in 2009.
1998 2015E
Source: Yara Fertilizer Handbook, PotashCorp

3. Growth of horticulture & floriculture: Buoyed by 50% growth experienced by
Indian floriculture industry
in last 3 years, Government Horticultural Production, India
of India has launched a (Mn tons) 300
national horticulture
7.5%
2010
mission to double 205
production by 2012. 146
Growing horticulture and

floriculture industries will
result in increasing demand
for agrochemicals, 2002 2007 2012E
especially fungicides. Source: National Horticulture Mission
4. Increasing awareness: As per Government of India estimates, total value of crops

lost due to non-use of pesticides is around USD 17 Bn every year. Companies are
increasingly training farmers regarding the right use of agrochemicals in terms of
quantity to be used, the right application methodology and appropriate chemicals
to be used for indentified pest problems. With increasing awareness, the use of
agrochemicals is expected to increase.
Key Challenges
1. High R&D costs: R&D to develop a new agrochemical molecule takes an average
of 9 years and ~ USD 180 Mn Indian companies typically have not focused on
developing newer molecules and will face challenges in building these
capabilities, while continuing to remain cost competitive.
2. Threat from Genetically Modified (GM) seeds: Genetically modified seeds
possess self-immunity towards natural adversaries which have the potential to
negatively impact the business of agrochemicals.
3. Need for efficient distribution systems: Since, the number of end users is large
and widespread, effective distribution via retailers is essential to ensure product
availability. Lately, companies have been directly dealing with retailers by cutting
the distributor from the value chain thereby reducing distribution costs,
educating retailers on product usage and offering competitive prices to farmers.
4. Support for Integrated Pest Management (IPM) & rising demand for organic
farming: Promotion of IPM, zero budget farming and usage of bio-pesticides by
Indian Government and NGOs is gaining momentum. With increasing demand for
organic food, farmers in certain states like Karnataka have reduced chemical
usage and have adopted organic farming. Agrochemical companies will have to
tackle the rising environmental awareness and address concerns on negative
impact of pesticide usage.
5. Counterfeit Products: The spurious pesticides market size in India is estimated to
be USD 233 Mn in 2009. This negatively impacts the revenues of the organized
sector.

Key Opportunities
1. Scope for increase in usage: With ~35-40% of the total farmland under crop
protection, there is a significant unserved market to tap into. By educating
2010 farmers and conducting special training programmes regarding the need to use
agrochemicals, Indian companies can hope to increase pesticide consumption.
2. Huge export potential: The excess production capacity is a perfect opportunity to
increase exports by utilizing India's low cost producer status.
3. Patent expiry: Between 2009 and 2014 many molecules are likely to go off patent
throwing the market open for generic players. The total viable opportunity
through patent expiry is estimated at over USD 3 Bn.
Yield improvement potential 30% further

(%) losses
42% actual Due to drought
losses heat, cold, salinity
Due to pests 130%

28% prevented weeds & diseases
losses 100%
Due to pests
weeds & diseases
58%
30%
Yield without Actual yield Attainable Additional

protection with crop protection yield without pests potential without
abiotic stress
Source: Bayer Cropscience research, Emkay research
4. Product portfolio expansion: Threats like genetically modified seeds, Integrated

Pest Management, organic farming etc. can be turned into opportunities if the
industry re-orients itself to better address the needs of its consumers and
broadens its product offering to include a range of agri-inputs instead of only
agrochemicals.
References
1. Crop Protection market in India 2008, Frost & Sullivan
2. Crop protection Business in the New Decade, 2010 presentation, Cheminova
3. Annual Reports FY10: Bayer Crop Science, Rallis and United Phosphorous Limited
4. Global Markets for Agrochemicals 2009, BCC Research

Pratik Kadakia (pratik.kadakia@tsmg.com), Jeffry Jacob (jeffry.jacob@tsmg.com) and Siddhartha Gondal
(siddhartha.gondal@tsmg.com)

Specialty Chemicals
Specialty Chemicals
Understanding specialty chemicals
Specialty chemicals are defined as a "group of relatively high value, low volume 2010
chemicals known for their end use applications and/ or performance enhancing
properties." In contrast to base or commodity chemicals, specialty chemicals are
recognized for 'what they do' and not 'what they are'. Specialty chemicals provide the
required 'solution' to meet the customer application needs. It is a highly knowledge
driven industry with raw materials cost (measured as percentage of net sales) much
lower than for commodity chemicals. The critical success factors for the industry
include understanding of customer needs and product/ application development to
meet the same at a favorable price-performance ratio.
BASE CHEMICALS SPECIALTY CHEMICALS

Sold by "specification", Sold by
defined purity "performance/impact", not
composition
Seller provides required
Selection of chemical
"solution" to meet customer
done by customer
application needs
CSFs : Access to secure CSFs : Price/performance
and competitive supply ratio for specific application,
of raw materials, technical assistance,
efficient operations and channels to market
supply chain
Generally medium to Generally low to medium
high volume products volume products with higher
with lower price price realization
realizations
Significance of specialty chemicals

The specialty chemicals segment (including the knowledge chemicals) currently
estimated at ~USD 27 Bn, constitutes about one-third of the Indian Chemical industry.
The specialty chemicals segment caters to a large number of end use industries
including construction, automotive, polymers, personal care products, water
treatment, textile, paints and coatings, etc. The knowledge chemicals segment caters
to the key end use industries of pharmaceuticals, agrochemicals and biotechnology.
Specialty chemicals growth story

The specialty and knowledge chemicals industry combined has been growing at rates
higher than the overall chemical industry and is expected to continue to grow at 14%-
15% p.a. to reach ~USD 50 Bn by 2015. The growth slowdown, demand contraction
and recovery witnessed over the last year or so have not impacted the long-term
growth prospects of the industry.

50-55
Indian Specialty & Knowledge Chemicals
Industry (USD Bn)
14-15%
2010
27
11%
18
FY06 FY10 FY15

Source: Tata Strategic estimates
Changing income distribution and evolving end use market are the key growth drivers
for specialty chemicals. Rapid rise of the mid income households is expected to create
a larger consumer base for products using specialty chemicals.
Changing Income Distribution- India

(Households in Mn)
Rs. Lakh > 12 ~20 ~22 ~23
p.a
Premium 4 8
2
Mass
2.4 -12 2 4
Affluent 1
Mass 1.1 - 2.4 7 10
5
Basic < 1.1 13 11 7
2 4 8
2005 - 06 2009 - 10E 2013 - 14E
Source: NCAER, Tata Strategic analysis
Additionally, high growth in end use markets and evolving customer needs are
expected to drive the growth of specialty chemicals. Major end use industries -
textiles (esp. performance textiles), automotive, glass, construction and paints- are all
expected to register double digit growth rates in the next five years. Also emerging
needs in several of these end use industries is creating demand for high performance
specialty chemicals driving penetration growth.
Growth potential: India's strong position on industry CSFs

India's strengths such as large market size, knowledge of unique customer needs,
strong R&D capabilities and process know-how are aligned to achieve success in the
specialty chemicals industry. The strong position of India on these CSFs indicates the
growth potential. A comparison with the European chemicals industry and its

END USE MARKET GROWTH-INDICATIVE LIST (% p.a.) EVOLVING CUSTOMER NEEDS
- retardants, water
repellents, wrinkle free, flame
Textiles 20% Dirt
repellents
Lighter engineering plastics, catalytic converter
Auto 16%
Glass 15%
substrates, fuel additives, high performance
coolants, brake fluids, 2010
Low emissivity coatings, reflective glass, self
cleaning glass
Construction 14% Structural adhesives, cement admixtures, surface
coating
Paints 12% Glow paints, scratch proof paints, nontoxic edible
paints
Paper 9% Water proof paper, glazed paper
Source: Industry reports, Tata Strategic analysis
evolution is a case in point. Faced with a similar structural framework of limited

carbon based feedstock availability, European chemical industry developed the
specialty chemicals segment which has a much lower dependence on raw materials
than base chemicals. India could very well emulate the growth of specialty chemicals
industry in Europe which is currently estimated at more than 10 times the size of the
industry in India.
Way ahead for specialty chemical companies

Given India's potential to emerge as a global specialty chemicals demand and
production destination, companies could explore how best they could participate in
this growth story. A detailed growth strategy formulation would need to be based on
each company's respective strengths and focus areas. However few overall factors as
mentioned below would need to be addressed to compete successfully in the
specialty chemicals industry.
Emerging trends in consumer industries call for innovation and development of local
products/ solutions based on understanding of the unique needs of the Indian
consumer. Secondly, the development of strong channels to reach out effectively to
customers is of immense strategic significance. Establishing leadership position in
sustainable growth through an integrated approach across the value chain could help
create positive differentiation. This would not only help companies create value
through green product/ process innovation but also generate end consumer pull
through ingredient branding in "green products". Finally the development of
chemical/ petrochemical infrastructure/ clusters through PCPIRs (Petroleum,
Chemicals and Petrochemicals Investment Regions) could enable companies to
establish effective upstream linkages for increased cost effectiveness.
A brief overview of some of the key segments of specialty chemicals is covered in this
report, focusing on the demand and supply scenario, projected growth & drivers and
key trends & future outlook in each segment.
PAINTS & COATINGS

Introduction
The Indian paint industry is estimated at ~USD 3.4 Bn. And can be broadly classified
into 2 segments:

Decorative Paints: This segment primarily caters to the residential and commercial
buildings and accounts for 70% of the total paint industry. Enamels are the most
widely used followed by distempers and emulsions. Interior and exterior paints
account for 75% and 25% of the decorative paints respectively. On the basis of
2010 product composition, decorative paints are of two kinds - water based and solvent
based.
Decorative paints segments
Wood
finishes
(% of total volume) 2%
Ext. coatings 12%
Emulsions
17% Enamels
50%
Distemper
19%
Industrial paints: This segment includes paints used in automobiles, auto ancillaries,
consumer durables, containers, etc. This segment requires technological expertise and
therefore it is largely served by the organized sector. It accounts for 30% of the overall
market.
Industrial paints segment wise breakup: FY09
Others, 5%
Marine,
10%
Auto OEM,
Refinish, 36%
12%
Powder,
13%
Protective,
24%
Source: Industrial reports, Tata Strategic analysis
Demand and supply scenario

The Indian paint industry, valued at ~USD 3.4 Bn. has been growing at 1.5-2 times the
GDP growth with a CAGR of 13.5% over the last five years. Owing to the economic
downturn, the growth slowed down in the last 2 years. However, the growth is
reported to have picked up with the resurgence of the construction industry.

Indian paint industry growth 3.4
(USD Bn)
13.5
1.8 2010
2005 2010
Paint industry is highly consolidated with 80% market captured by the organized
sector. The major players in the paint industry are Asian Paints, Kansai Nerolac,
Berger Paints and ICI.
In the decorative segment, Asian Paints is the market leader followed by Berger and
Kansai Nerolac. Kansai Nerolac is the market leader in industrial paints followed by
Berger and Asian PPG.
Decorative paints market share by value: Fy09

(% of total value)
Others,
33% Asian
Paints,
37%
Shalimar,
2%
Akzo
(ICI), 7% Berger
Kansai
Nerolac, Paints,
8% 13%
Source: Industry Reports, Tata strategic analysis
Industrial paints market share by value: Fy09

(% of total value)
Kansai
Others, Nerolac,
36% 29%
Berger,
Shalimar,
12%
4%
BASF, 7% Asian
PPG, 12%

Projected growth and drivers
With the market recovering from the economic downturn, the paint industry is
expected to grow at a CAGR of 14% in the next five years. In the decorative paints
2010 segment, water based paints are expected to drive growth with a CAGR of 15%. The
key growth drivers of the paint industry are detailed below:
Low per capita consumption: The per capita consumption of paints in India is very
l
low at 1.25 Kg against 38 Kg in Singapore, 25.8 Kg in the U.S or 2.5 Kg in China.
Growth in automotive industry: Growth of automotive paint industry is directly
l
linked to the growth of passenger vehicles and commercial vehicles (expected
CAGR >15%).
Rapid growth in residential and commercial real estate with regulation permitting
l
100% FDI flow
Untapped rural market: There is a shift in rural demand from cement paints to
l
better quality paints.
Growing middle class with increasing disposable incomes
l
Indian paint industry growth 6.5

(USD Bn)
14%
3.4
2010 2015
Key trends and future outlook

There is a shift in market shares in favour of organized companies at the expense of
unorganized segment due to entry of organized players into low cost distempers and
enamels. While solvent-based enamels are still popular in India, a shift is being seen
from solvent- to water-based paints. Keeping the environment concerns in mind,
companies are coming up with new lead free and low Volatile Organic Compound
(VOC) products. There is also a perceptible shift towards usage of organic pigments in
premium paints with heavy metal pigments being phased out. Companies which
adapt to these trends could grow successfully in the paints market.
COLORANTS
Introduction
The colorant industry comprises two sub segments- dyes and pigments.

There are 12 types of dyes, classified on the basis of the usage, however disperse,
reactive and direct dyes are the most commonly used in India. Pigments are broadly
classified as organic and inorganic. The pigment market is estimated at ~7 lakh tons
p.a. with a market size of ~USD 970 Mn. Carbon black and TiO2 accounts for the 90%
of the total pigment production. 2010
Classification of colorants
Colorants
Dyes Pigments
Soluble substances
used to pass color to Insoluble substances
the substrate and are in powdered or
granular form
Major end use
industries are textiles Impart color by
and leather reflecting only certain
light rays
Major end use
industries are paints
and inks
Pigments demand, India: Fy10

(tons per annum)
Pigments
(678,000)
Carbon Black & Colour & Special

TiO2 (615,000) Effect (63,000)
Organics
(19,500) Inorganics
Special Chrome Synthetic

Others Others Iron Oxide
Effect oxide

India accounts for ~7% of the global share of the dyestuffs industry and produces
~150,000 tons p.a. In India, the dyes industry supplies the majority of its production,
almost 80%, to the textile industry. The balance is consumed by the paper and leather
industry.

Pigments by end use
(% by volume)
Others,
9%
Plastics,
10%
2010 Inks,
Textiles,
10% 47%
Coatings,
24%
Also, these dyestuffs are exported to Europe, South East Asia and Taiwan to cater to
the textile industries in these countries. Printing inks and coatings account for greater
than 70% of consumption of pigments. Growth in these end use industries is driving
the growth of pigment industry.
The Indian dyestuff industry is highly fragmented and characterised by a large
number of players in the unorganized sector. Around 1,000 units fall under the small
scale industry category and only about 50 are large organized units. These units are
mainly present in the western states of Gujarat and Maharashtra, with Gujarat
accounting for almost 80% of capacity.
Within India, the major players in the pigments industry are Sudarshan Chemicals,
Golchha Pigments, Tata Pigments and Clariant India while in the dyestuff industry,
companies such as are Atul, Clariant India, Kiri dyes, and IDI are large players present
in the organized sector.
Total installed capacity for organic pigment is 80,000 tons p.a., which is way higher
than the demand from the Indian market. Large proportion of the organic pigments
produced is exported. There are also niche markets in India for special effect
pigments such as metallic and pearlescent. These pigments are usually imported into
the Indian market, with Sudarshan Chemicals being the only domestic manufacturer.
Though the volume for these pigments would be very small as compared to other
pigment segments, they usually command a premium for the design appeal that they
provide to the final product such as automotive coatings and packaging materials.

Globally, the demand for dyes and organic pigments is forecast to increase 3.9
percent per year to ~USD 16.2 Bn in 2013. This growth will have a direct bearing on
the domestic production of dyes and organic pigments since a large proportion of
production is exported. Moreover, after the REACH (Registration, Evaluation,
Authorization and Restriction of Chemicals) regulation, costs of handling effluents
have increased. As a result a large number of companies have begun to relocate their
operations to the Asian markets, particularly India and China.
Due to a greater use of polyester and cotton-based fabrics, there has been a shift
towards reactive dyes used in cotton-based fabrics and disperse dyes used in
polyester. The demand for reactive and disperse dyes is expected to grow fastest due
to this continued demand.

The textile industry will remain the largest consumer of dyestuffs; however growth
will be driven by markets such as printing inks, paints and plastics. These segments
are also expected to increase the consumption of high performance pigments helping
improve profitability. At around 8% growth, the Indian colorants industry (including
pigments, dyes and dye intermediates) is likely to reach ~USD 5.1 Bn by 2012-13 and 2010
is expected to capture 10-12% of the global market.
Market
Global overcapacity
Customer requirements of
environment friendly and high
performance products
Trends in Dyes
& Pigments
Technology industry Regulatory
Color solution Stricter domestic

approach to counter environmental
commoditization laws
Source: Tata Strategic analysis Compliance to
REACH

Market Trends - High performance products
The global capacity of dyestuffs has exceeded the demand resulting in an oversupply
scenario. Due to the lack of export demand, the prices of the colorants had dropped
by roughly 20% in the recent past. It is expected that consumer preference for
environmentally friendly products and high performance dyes and organic pigments
will help improve overall value of the market.
Regulatory Trends - Stricter environmental laws
Fiscal policies and excise concessions led to a high level of fragmentation in the Indian
dyestuffs market. However, a gradual reduction in the excise duty has resulted in a
more balanced pricing differential between the organized and unorganized sectors.
The organised sector, with a better product range, technology and marketing reach,
was able to increase its market share. Further, various regulations such as REACH and
ban on certain dye stuffs have impacted the exporters resulting in the closure of small
establishments and helping increase the share of the organized players.
Technological Trends - Commoditization
Since majority of dyestuffs are commodities there is not much product differentiation
and duplication of products is easy. To counter the same, global manufacturers are
investing in research and development to improve the specialty end of their portfolio.
There is also a trend towards providing colour solutions rather than just a colorant.
Collaborations with equipment manufacturers are being undertaken to provide
integrated solutions to customers.
The financial crisis in 2008 has resulted in a demand slump, worldwide over-capacity
and further margin pressures on the dyestuff industry. The Indian dyestuff industry is

facing challenges due to reduced export demand growth and decreasing profitability.
Companies with greater focus on innovation and Research & Development will
benefit in the long run. Adopting green chemistry practices and compliance to more
stringent export market regulations would help ensure greater access to export
2010 markets. Such a holistic approach could ensure that the Indian dyes and pigments
industry is able to overcome the challenges and convert them to opportunities,
resulting in profitable growth.
Construction Chemicals
Introduction
The Indian construction chemicals market, valued at ~USD 340 Mn consists of a
variety of products ranging from admixtures to sealants to flooring chemicals.
However, the market is still very small when compared to other global markets like
the United States which is estimated at ~USD 7.7 Bn. Admixtures form the biggest
segment with 35% share followed by flooring chemicals with 15% share.

The market, boosted by the investment in construction sector has been growing at a
CAGR of 14 % from USD
Indian Construction chemicals market 340
14%
180
2005 2010
Product share
(% of total value)
Misc., 31 Admixtures,
35
Repair &
rehabilitation
9
Water Flooring,
proofing, 15
10

180 Mn in 2005 to reach USD 340 Mn in 2010. With the economic slowdown, the
growth slowed down in 2009, but has gained momentum thereafter.
The overall market is fairly consolidated but there is considerable fragmentation of
individual products and application areas. The top 5 players account for ~50% of the
market; the rest being accounted by small and unorganized players. Fosroc, SIKA India
2010
& BASF SE are the leading players in the Indian construction chemicals market.
Market share by revenue: 2009

FOSROC,
14%
SIKA India,
13%
Others,
50%
BASF,
12%
Pidilite,
SWC, 6%
5%

The market for construction chemicals is expected to grow at a CAGR of 14.5% to
reach ~USD 670 Mn in 2015. Key growth drivers include:
Growth in construction activities due to increased investments in infrastructure
l
and real estate by private and public sector
100% Foreign Direct Investment (FDI) in real estate to boost construction
l
activities
Increasing usage of newer products like Ready-Mix Concrete
l
Development in untapped rural areas

l
Increased product awareness and compliance with international manufacturing

l
standards
Construction chemicals growth

670
(USD Mn)
14.5%
340
2010 2015

Construction chemicals market has a huge growth potential due to the construction
and manufacturing boom in India. Product innovation and diversification, producing
2010 low cost-high value products and creating product awareness among end users are
the key success factors.
Due to lack of entry barriers, competition is high and a lot of low value products are
being sold in the market. Margins are lowered because most contractors prefer low
cost chemicals to reduce the construction cost. High value products have limited
demand from premium construction houses. Companies with innovative, low cost
products are likely to capture the market.
Water Treatment Chemicals

Introduction
Water treatment chemicals are used for a wide range of industrial and in-process
applications such as reducing effluent toxicity, control Biological Oxygen Demand
(BOD) & Chemical Oxygen Demand (COD) and disinfecting water for potable purpose.
The Indian water treatment chemicals market is estimated at ~USD 560 Mn.
Coagulants and flocculants form the largest segment with ~ 40% market share
followed by biocides and disinfectants with ~ 17% market share. Apart from use in
potable water, the customer base is widespread across diverse industries ranging
from large power plants, refineries and fertilizer factories to pharmaceuticals, food
and beverages, electronic and automobile companies.
Product share
(% of total)
Others, 30%
Coagulants
& flocculants,
40%
pH
adjusters,
5%
Defoaming
agents, 7%
Biocides &
disinfectants
18%

The Indian water treatment chemicals market achieved an 8% CAGR in the period
from 2005-10 to reach ~USD 560 Mn in 2010. Certain segments like the industrial and
drinking water segments have seen even higher growth rates.
The market is highly competitive, and participants include private companies, MNCs,
as well as joint ventures. Around 60 percent of the market is dominated by the
organized sector, largely multinationals and large-scale domestic companies like Nalco
Chemicals India Ltd., Thermax Limited and Ion Exchange (India) Ltd. These companies
have a diverse product portfolio and a strong distribution network to cater to the
Indian market.

Water treatment chemicals market 560
(USD Mn)
8%
380
2010
2005 2010

The market for water treatment chemicals is expected to grow at a CAGR of 10% to
reach ~USD 900 Mn in 2015. Key market drivers include:
l Increasing urbanization and rising living standards
l Increased awareness about quality of drinking water and its impact on health
l Rapid industrialization leading to huge demand for effluent treatment
l Stricter effluent norms coupled with greater awareness about environment
l Awareness among end users about recycling water, and cost effectiveness of
recycling water in the long term
Water treatment chemicals market growth

900
(USD Mn)
10%
560
2010 2015
Source: Industry reports, Tata Strategic estimates

The market for water treatment chemicals has seen a shift from the traditional
products to technically more advanced products. For example, traditional products
like alum are being replaced by coagulants and flocculants. In the corrosion and scale
inhibitor market, there is an ongoing shift from the traditionally used heavy metal
based products to the ones which have better environmental profiles. Manufacturers
are increasingly producing patented formulations with exclusive rights that offer
customized solutions in a particular market.
The market is expected to grow in light of stricter Government regulations in
industrial and institutional domains. Innovative products catering to niche
applications are likely to help market participants build/ sustain their competitive
edge.

POLYMER ADDITIVES
Introduction
Polymer additives are specialty chemicals added to the base polymer to enhance
2010 certain properties or improve processing. The Indian polymer additives market is
estimated at ~ USD 300 Mn. Plasticizers form the largest segment with 43% market
share followed by heat stabilizers with 21% market share. From the applications
perspective, PVC consumes the maximum amount of additives accounting for 40% of
the total market followed by poly-olefins with 20%.
Product share: 2008

(%) Others,
19%
Light
stablizers,
4% Plasticizers
43%
Flame
retardents,
5%
Antioxidants
8%
Heat
stablizers,

Indian polymer additives market has been growing at a CAGR of 10.5% in the last five
years and is estimated at ~USD 300 Mn.
Polymer additives market size 300
(USD Mn)
10.5%
165
2005 2010
The organized segment has approximately 35 players and is dominated by

multinational companies like Ciba India Ltd., Clariant Chemicals India Ltd., BASF,
Lanxess India Private Ltd., Baerlocher India Ltd., Akzo Nobel Chemicals (India) Limited
and Rohm & Haas India Pvt. Ltd. Major domestic players include KLJ Group, Fine
Organics and Vision Organics Limited. KLJ Group and Baerlocher India are the market
leaders in plasticizers and heat stabilizers, respectively. Ciba is the market leader in
flame retardants, light stabilizers, and antioxidants.

The market for polymer additives is expected to grow at a CAGR of 11% to reach
~USD 500 Mn in 2015. Key market drivers include:

Growth in the particular end-user markets: e.g. growth in plastic demand due to
l
increased usage in packaging, construction and automotive sectors
Increasing environmental concerns
l
Replacement of wood, metal and glass by plastic across various applications

l
2010
Polymer additives market growth 505
(USD Mn)
11%
300
2010 2015

Development of environment friendly additives is a major challenge being faced by
the industry. Increasing demand for environment friendly additives by domestic
market together with regulations such as REACH on exports is forcing players to adopt
environment friendly products. With rising consumer awareness, players switching to
oleo-chemical route could have a competitive advantage over others. Strict regulation
on additive use in plastics is expected to drive demand and increase sales.
The market has recently witnessed falling prices and low profit margins due to
overcapacity of major manufacturers and reduction in import tariffs. The problem of
overcapacity is likely to be addressed either by certain players exiting the market or
via mergers and acquisitions. Companies that are able to modify their product
portfolio accordingly could have a competitive advantage over others.
PERSONAL CARE INGREDIENTS

Introduction
The Indian personal care industry is
estimated at ~USD 6 Bn. It can be
India personal care product market: 2010
categorized into distinct product
segments such as bath & shower Deo & Others, 8%
fragrances,
products, hair care, skin care, oral Color 4% Bath & shower
care, fragrances etc. The bath and cosmetcis, products,
shower products segment is the 5% 31%
largest one. Skin care,

12%
The Indian personal care ingredients
market can be divided into active
and inactive ingredients. Actives and Oral care,
inactives account for 40% and 60% 15%
Hair care,
by value of the total personal care 25%
ingredients market respectively.

Inactive ingredients Active ingredients
Colorants Anti - ageing
Surfactants Exfoliants
2010 Preservatives Conditioning agents
Polymer ingredients UV ingredients

Personal care ingredients market has grown at 12% in the period 2005-10 to reach
~USD 400 Mn. Rising income, increased availability and wider product portfolio of
companies has led to growth in personal care products and thereby personal care
ingredients.
The market is extremely competitive with more than 1,500 manufacturers of
personal care ingredients in India. The market is dominated by small and medium
scale domestic companies which account for more than 50% of the market. Major
domestic players include Vivimed Laboratories and Sami Labs. On the other hand,
multi-national companies currently account for about 35% of the market. BASF India
Ltd., Ciba Specialty Chemicals and Clariant Chemicals are the leading multinational
players in India.
Personal Care Ingredients market
(USD Mn) 400
12%
220
2005 2010
Source: Tata Strategic analysis

Personal Care Ingredients market in India is expected to grow at 14% to reach ~USD
770 Mn. by 2015. Key growth drivers include:
Growth in the personal care products industry
l
Increasing personal care ingredient usage in formulation: Demand for products
l
with higher/ better performance
Preference for "green products": Huge export potential due the demand for
l
natural products
Product innovation: Development of multi-functional products
l

The industry is highly competitive with large number of domestic and international
players. Domestic companies are registering good growth due to their meeting the
market need for cost effective products. Indian personal care industry is highly cost
sensitive and companies develop domestic substitutes for ingredients used globally.
Indian market for personal care products like anti-ageing creams, sunscreen lotions
etc. is very nascent and is developing at a fast pace leading to increasing requirement
for investments in research and development of personal care ingredients.

The growing awareness amongst the consumers is increasing the market for natural
personal care products and in turn for natural ingredients. The rich heritage of
Ayurveda is expected to make India a hub for natural ingredients
Companies which are able to innovate and come out with value offerings to meet
unique needs of the Indian consumers could have a competitive edge in the market. 2010
Personal Care Ingredients market growth
770
(USD Mn)
14%
400
2010 2015
Source: Industrial reports, Tata Strategic estimates
PRESERVATIVES
Introduction
The preservative market in India is estimated at ~USD 50 Mn. Paints, personal care
products and construction chemicals account for 65% of the total preservative
market.
Preservative Market distribution by
application: 2010
Animal Others,
biosecurity, 6%
7%
Water Paints,
treatment, 29%
7%
Gas and
oil, 14%
Construction Personal
Chemicals, Care, 23%
14%
Demand & Supply Scenario

The preservative demand in India has been rising in the recent past fuelled by the
growth in end user industries and rising consumer awareness. Currently, the market is
estimated at USD 50 Mn.
Preservative market in India is highly consolidated with organized sector having a
market share of ~75%. Some of the major companies in the organized sector are
Lanxess, Clariant, Thor Chemicals, Troy Chemicals, Arch Chemicals and Dow
Chemicals.

The preservative market in India is expected to grow at an annual rate of 12%.
Growth is expected to be driven by growth
2010 in major end use industries such as Expected growth rate for preservatives
across segments: 2010-15
construction, personal care and paints.
Construction 16.0%
Major growth drivers for preservatives are:

Personal Care 12.5%
Growth of key end use industries such as
l
paints, construction and personal care Leather 11.5%
Increasing usage of water based paints

l
Paints & coatings 11.0%
Demand for natural products and high

l
shelf life of personal care products Cooling water 11.0%
Greater usage of construction chemicals

l
HI & I 9.5%
in construction activities
Increasing awareness for quality
l Paper 8.0%
products Source: Industry reports, Tata Strategic analysis

Following the EU/ US markets, companies in India are moving away from the usage of
products having harmful impact on the environment. Some of the widely used
products such as Formaldehydes, Pentachloro Phenols, etc. are slowly being phased
out.
With newer players venturing into Indian market, companies may look into
strengthening their competitive positions by providing full range of preservatives and
offering blends as per customer requirements. Focus may shift to providing services
along with the products which would act as the differentiating factor. The end to end
services may include involving joint development with customers to provide
customized solutions, providing R&D and testing facilities to know the efficacy of the
end product.
References
1. CMIE report, Industry Market Size & Shares, April 2009
2. Research reports, Crisil Research
3. Business Press
4. Company Annual Reports
5. European Federation of Concrete Admixtures Associations
6. Chemistry Today, vol. 27, July-August 2009

Pratik Kadakia (pratik.kadakia@tsmg.com), Abhishek Nigam (abhishek.nigam@tsmg.com) and Mandeep Sandhu
(mandeep.sandhu@tsmg.com

Biotechnology
Introduction
Food Energy Healthcare
Bio-Agri Bio-Industrial Bio-Pharma Bio-Services Bio-Informatics
Established applications 2010

Bt Cotton, Hormones (Insulin), Clinical trials, bio-- Data warehousing, mining,
Bio-enzymes
Herbicide resistant corn, Vaccines (Hep B), MAbs1, equivalence and bio-- DNA sequencing, data
1st Gen Biofuels
GM Soybean etc. Interferons ((, )) availability studies management
The next wave

wave...
-
Bio-fertilizers? -
Bio-plastics? Stem cell research? India as a hub for KPO2 by Prediction of gene
Bio-pesticides? -
Bio-chemicals? Therapeutic proteins from pharmaceutical expression?
Bio-manure? 2nd & 3rd Gen Bio-fuels?
- transgenic chicken eggs? companies? Modeling of evolution?
Market Size ($ bn)

bn - India
-India - Global
-Global
0.43 23 0.13 8.5 2 130 0.6 28 0.05 8.2
Prominent Players
In its most general sense, biotechnology can be used to refer to any technology that
uses biology to accomplish its end. The biotechnology market consists of the
development, manufacturing and marketing of products based on advanced
biotechnology research. It addresses globally relevant themes like food, energy,
healthcare etc. The biotechnology industry is divided into 5 key sub-segments
Bio-Pharma: Biopharmaceuticals are medical drugs derived from life forms. They are
proteins (including antibodies), nucleic acids (DNA, RNA or antisense
oligonucleotides) used for therapeutic or diagnostic purposes, and are produced by
means other than direct extraction from a biological source. Bio-pharma (also known
as "Blue" biotech) includes products made by fermentation, animal cell culture and
plant cell culture.
Bio-Agri: Bio-agriculture (also known as "Green" biotech) includes analysis of
Genetically Modified (GM) seeds, molecular markers and related products. Hybrid
seeds are not considered part of Bio-agriculture.
Bio-Industrial: Bio-industrial segment (also known as "White" biotech) consists
primarily of enzymes used for industrial purposes in detergents, leather, paper, foods
& beverages, starch, textile and various other industries. Upcoming segments like bio-
fuels and bio-plastics are also part of bio-industrial segment.
Bio-Services: Bio-services consists of clinical research, contract research and custom
manufacturing for Bio-pharma products.
Bio-informatics: Bio-informatics is usage of computer software tools for database
creation, data management, data warehousing and data mining for molecular biology
applications.
Global Biotechnology Market

The global biotechnology market was estimated at ~ USD 200 billion in 2009 having
grown at a CAGR of 10.2% from USD 136 billion in 2005. It is estimated that the global
market will grow at a CAGR of 9.6% to reach ~ USD 320 billion by 2014.

Medical products accounted for 66% of global revenues while Bio-services market
accounted for 14% of value in 2009.
Global Biotechnology Industry

2010 (USD Bn)
318
9.6% p.a.
201
10.2% p.a.
136
2005 2009 2014E
Source: Datamonitor
Global biotechnology segmentation

(2009)
Env & Ind Technology
processing service
4% 4%
Food and
Agriculture
12%
Services
14%
Medical
Products
66%
Source: Datamonitor
Americas and Asia-Pacific regions together accounted for more than 70% of the
global market in 2009.
While the Asia Pacific market is projected to grow at 10.6% for the five year period
from 2009-2014, the European market is expected to show a comparatively slower
growth of 7.8% during the same period.
Global biotechnology regional share

(2009)
Asia-Pacific Americas
26% 49%
Europe
25%
Source: Datamonitor

Indian Biotechnology Market
Indian Biotechnology Industry
3.16
(USD Bn)
21.5% p.a. 2.7
2010
2.28
1.9
1.45

Source: ABLE, Biospectrum, Tata Strategic projections
Industry Overview
The Indian biotech industry currently accounts for 1.6% of the global market and has
more than doubled in size in the past five years from USD 1.45 billion (Rs. 6,520 Cr.) in
FY06 to USD 3.16 billion (Rs. 14,200 Cr.) in FY10 growing at a rate of 21.5%.
Indian biotechnology industry is largely exports driven with exports accounting for
53% of the revenues in FY10. Export value in FY10 stood at USD 1.67 billion (Rs. 7,530
Cr.) with Bio-pharmaceuticals and Bio-services leading in exports.
Indian Biotechnology Exports

(USD Bn)
22% p.a. 1.67
1.56
1.42
1.09
0.76

Source: ABLE, Biospectrum
Indian Bio-services segment is purely export oriented with 95% of revenues coming
from exports in FY10. This is primarily because of India's status as a key outsourcing
destination owing to its skilled labour, diverse gene pool and low cost operations.

Indian Biotechnology exports
(% share)
Bio-industrial
Bio-agri 2%
1% Bio-informatics
2010
Bio- services
33%
Bio-pharma
63%
Indian Bio-pharma segment registered export sales of 54% of total segment revenues,
followed by bio-informatics at 32% and bio-industrial at 22%. Bio-agri segment had
the lowest exports at 3% in FY10 given a large domestic market owing to India's large
agriculture sector.
Key Segments
Bio-pharma is the leading segment in Indian biotech industry while bio-services &
bio-agri have been the fastest growing.
Bio-Pharma
Bio-pharma segment grew by 12% over FY09 revenues to reach USD 1,962 million (Rs.
8,829 Cr.). Vaccines (both animal and human) was the largest sub-segment,
accounting for 25% of the total bio-pharma market. Vaccines segment is expected to
be the key contributor to the growth of the bio-pharma market in the coming years
driven by government immunization programs and increased awareness. Bio-generics
is expected to be another significant growth driver with several blockbuster drug
patents expiring over the next few years. Diagnostics is another high growth sub-
segment contributing 23% to bio-pharma revenues. This segment is characterized by
the presence of a large number of multi-national companies like Roche, Bayer
diagnostics etc. and is growing at 15-20%. The therapeutics sub-segment is led by
cancer therapeutics with sales of USD 69 million (Rs. 311 Cr.) in FY10. With India
emerging as the diabetes capital of the world, Indian insulin market is estimated to be
USD 140 million.
Indian Biotechnology Industry Segment Summary (FY10)
CAGR
Biotechnology Revenue (USD million) Market Share
FY 06-10
-10
Bio-Pharma 1,962 62% 17%
Bio-Agri 586 19% 38%
Bio -Industrial
Agri 430 14% 34%
Bio-Industrial
Bio-Services
Bio -Industrial 125 4% 11%
Bio -Informatics
Bio-Informatics 51 2% 18%

Bio-Services
Bio-services grew 28% over FY09, accounting for 19% of the total biotechnology
market. The growth is driven not only by MNCs outsourcing services to India but also
by a growing number of Indian firms outsourcing various parts of the drug discovery 2010
chain. A significant trend emerging in this competitive market is strategic alliances
between players to augment their services portfolio and span a larger section of the
value chain. The bioservices segment has been seeing a spate of collaborations and
alliances including
o SIRO Clinpharm alliance with Dream CIS, South Korea
o Syngene International pact with Sapient Discovery, USA and Endo Pharma, USA
o Ecron Acunova tie-up with a Japanese CRO
o Veeda Clinical research agreement with Malaysian health ministry
Bio-Agri
Bio-agri segment has been growing at a astounding rate of 34% over the past five
years. The immense success of Bt-Cotton in India has led to increased interest in
Genetically Modified (GM) crops pushing Bio-agri in prominence across the
biotechnology landscape. At 88% adoption and 8.4 million hectares of total cotton
area under Bt, India is the 4th largest adopter of biotech crops in the world after USA,
Brazil and Argentina. Bt cotton seed market in India is estimated to be over USD 400
million, with over 30 companies marketing the seeds. However, there is a strong
lobby against adoption of Bt food crops in India, limiting segment growth. Inspite of
moratorium on Bt-Brinjal, various other crops like Rice, Maize, Mustard etc. are under
advanced stage of GM trials. Scientists at ICRISAT and Haryana Agricultural University
(HAU) are working towards developing GM Chickpea and Pigeonpea, the adoption of
which might provide the much needed boost to India's pulses production.
The domestic market potential, combined with scientific infrastructure in agriculture,
rich bio-diversity and skilled human-power is poised to make India an important
global base for Bio-agri research.
Top 20 Biotechnology companies by revenues: FY10
FY10 Revenues % change FY09
Rank Company Segment
(Rs. Crores) over FY09 Rank
1 Biocon 1,180 29% 2 Pharma
2 Serum Institute 850 -24% 1 Pharma
3 Panacea Biotec 703 18% 3 Pharma
4 Nuziveedu Seeds 477 6% 4 Agri
5 Reliance life sciences 450 - - Pharma, Agri, Industrial etc.
6 Quintiles 375 - - Services
7 Rasi Seeds 359 -4% 5 Agri
8 Novo Nordisk 342 4% 6 Pharma
9 Shantha Biotech 334 35% 11 Pharma
10 Mahyco 312 48% 10 Agri
11 Indian Immunologicals 273 18% 8 Pharma
12 Bharat Biotech 272 13% 14 Pharma
13 Novozymes South Asia 268 7% 7 Industrial
14 Monsanto 255 -26% - Agri
15 Syngene International 252 12% 9 Services
16 Jubilant Organosys 249 3% 15 Services
17 Eli Lilly 187 14% 13 Pharma
18 Bharat Serums 175 25% 12 Pharma
19 Haffkine Biopharma 169 - 18 Pharma
20 Siro Clinpharm 150 -46% - Services

Bio-Industrial
Indian bio-enzymes industry grew by 18% over FY09, with revenues of USD 125
million. Indian enzymes industry is witnessing a marked shift in focus from traditional
2010 segments like detergents, starch, textiles, leather etc. towards newer applications.
The fast growing packaged F&B segment presents a significant opportunity for food
enzymes like pro-biotics, lipases etc. Indian F&B enzymes market is expected to reach
USD 47 million by 2015. Bio-fuels and Bio-plastics are also seeing increasing interest
and investments and are expected to be large markets in the future. Indian biofuels
industry is expected to reach USD 1.3 billion by 2015. Even though Enzymes
consumption in India is low compared to other countries, their application is
increasing in almost all end use industries in India. There is growing interest of MNCs
in the market with large players like DSM and CHR-Hansen planning to grow
aggressively.
Bio-Informatics
Bio-informatics is the smallest segment with just 2% share. Most of the bioinformatics
companies are SMEs based in Pune, Bangalore and Hyderabad.
Major Players
Biocon is the leading biotechnology company in India with revenues of Rs. 1,180
crores in FY10. It is present in bio-pharmaceuticals commercialization and markets a
wide portfolio of drugs including Statins, Insulin, Immunosuppresants and a range of
biogenerics. Biocon's branded formulations include INSUGEN, BIOMAb EGFR, EPO,
etc. It has a robust drug pipeline, led by monoclonal antibodies and has Asia's largest
Insulin, Statin and perfusion based antibody production facilities. Biocon has already
successfully launched its first anti-cancer drug and is developing conjugated
antibodies with a US Biotech start-up, IATRICa, to potentially deliver therapeutic
cancer vaccines. Biocon's biosimilar insulin is one of the world's most affordable
therapies for insulin dependent diabetes.
The top three biotechnology companies in India, Biocon, Serum Institute & Panacea
Biotec belong to the bio-pharmaceutical sector and account for 19% of the total
biotechnology market.
The top 3 fastest growing companies of FY10 are Stempeutics, Lambda Therapeutics
Research and Max Neeman International with Y-o-Y growth rates of over 100% in
Fy10.

Government of India
Department of Ministry of
Biotechnology Environment 2010
Recombinant
Recombinant DNA Approval
Approval RegulatoryCommittee
Regulatory Committee on on Genetic
Genetic Engineering Approval
Approval
Committee (RDAC)
Committee (RDAC) Genetic
GeneticManipulation
Manipulation(RCGM)
(RCGM) Committee (GEAC)
Committee (GEAC)
Institutional Biosafety
Institutional Bio-safety StateBiotechnology
State BiotechnologyCoCo
Committees (IBSC)
Committees (IBSC) ordination Committee
-ordination Committee(SBCC)
(SBCC)
District Level Committee

District Level Committee(DLC)
(DLC)
Regulatory Structure
A multi-regulatory structure has been established to approve bio-tech products
related to health and crops ensuring human and environmental safety. Department of
Biotechnology (DBT) constituted under the Ministry of Science is the nodal agency for
policy promotion regarding R&D, International Co-operation and manufacturing
activities. DBT is supported by six competent authorities viz. Recombinant DNA
Advisory Committee (RDAC), Review Committee on Genetic Manipulation (RCGM),
Institutional Biosafety Committees (IBSC), Genetic Engineering Approval Committee
(GEAC), State Biotechnology Coordination Committee (SBCC) and the District Level
Committee (DLC). The RCGM established under the Department of Biotechnology
(DBT) supervises research activities including small scale field trials, whereas
approvals for large scale releases and commercialization of GMOs are given by the
GEAC, established under the Ministry of Environment and Forests (MoEF). It is
mandatory for every institution engaged in GMO research to establish an IBSC to
oversee such research and to interface with the RCGM in regulating it. The SBCCs and
DLCs have a major role in monitoring safety and control measures in the various
industries/ institutions handling GMOs.
The Biotechnology Regulatory Authority of India (BRAI) Bill, 2010 proposes to set up a
regulatory authority which will be responsible for managing all biotech products in
India including agricultural and pharmaceutical products. It will monitor safety testing
of biotech crops and ensure scientific risk assessment and is expected to streamline
the safety and efficacy aspects. However, BRAI bill has been facing criticism for non-
transparency (negation of RTI) and inadequate representation of stakeholders like
farmers, NGOs and consumers.
Future Outlook
Growth drivers
India's inherent strengths in Biotechnology:
Growing number of international companies are looking at India as an outsourcing

l
destination with high-skill, low-cost advantage.

Cost of clinical trials in India is 50% lower in phase I and 60% lower in phase II
l
compared to global markets; clinical trials take lower time in India. India's diverse
gene pool is ideal for clinical research.
2010 Some of the world's most expensive drugs are produced at an affordable cost in
l
India with labour costs being 50% lower than western countries.
With India's expertise in reverse engineering, bio-generics presents a huge

l
opportunity with several high profile drugs coming off-patent. Bio-generics
opportunity in India is expected to be USD 2 billion by 2014.
Favorable IP climate:
Adherence to the TRIPS agreement with regard to the Patent Protection Act
l
implemented in 2005 has increased the confidence of innovator companies in
India.
Strong government support:

Biotechnology Regulatory Authority of India (BRAI) is expected to provide a single
l
window bio-safety clearance mechanism for all products.
The National Biotechnology Development Strategy (NBDS), formulated by the

l
Department of Biotechnology, aims to help the country build capabilities in sync
with international standards to become globally competitive.
Department of Biotechnology (DBT) has an outlay of USD 260 mn for FY11 for
l
biotechnology projects.
DBT is providing support for PPP in biotechnology through BIPP (Biotech Industry
l
Partnership Programme) with an outlay of USD 77 million.
DBT, in collaboration with The Wellcome Trust, UK, has announced investment of
l
45 million for research and development of innovative healthcare products at
affordable costs.
Karnataka state government is going to set up 5 new biotech parks and has already
l
invested USD 240 million towards new initiatives in Fy10.
Andhra Pradesh government is going to set up MedTech valley near Genome

l
Valley in Hyderabad through public private partnership.
KSIDC recently announced plans for a state-of-the-art life science park at

l
Thiruvananthapuram at a cost of USD 65 million through public private
partnerships (PPP).
The Center for Cellular and Molecular Biology (CCMB) has entered into
l
collaborations with Deccan Medical College (DMC) and Japan-based Nichi-in
Center for stem cell research. DBT is setting up Centre for Stem Cell Research
which has been approved by the Indian Council to conduct India's first ever multi-
centric clinical trials with stem cells. With significant investments by the

government, the stem cell research opportunity in India is estimated to be over
USD 500 million and expected to grow at 15%.
Collaborations and acquisitions:

2010
There is a strengthening trend of liaising and partnering in order to expand
l
competencies and capacities and enter new geographies. Also various MNCs are
looking to acquire established Indian companies to establish a foothold in the
Indian market.
Merck KGaA acquired bio-services company Bangalore Genei in October 2009.

l
Lonza Group took over the preclinical cell and molecular biology assets of
l
Bangalore-based Simbiosys Biowares India, also in October 2009.
DuPont acquired Nandi Seeds and the cotton germplasm business of Nagarjuna
l
Seeds to participate in the cotton seed market in India.
India is partnering with several European countries like UK, France, Switzerland etc
l
to enable international technology transfer.
Growth forecast
According to a research report on Biotech market in India, the year-on-year growth of
the biotech market is expected to accelerate in near future on the back of high
demand for vaccines, CROs, bio-pesticides, bio-fertilizers, bio-similars, biofuels and
bio-therapeutics both in India and at the global level and take-off of various mega
initiatives by state governments and Department of Biotechnology. Indian
biotechnology industry is expected to grow at ~23% and reach USD 8.8 billion by
Fy15.
Indian Biotechnology Industry 8.8

(USD Bn)
22.7% p.a.
3.2
FY10 FY15
Source: ABLE, Biospectrum, Tata Strategic estimates

References
1. Association of Biotechnology Led Enterprises Survey 2010
2010 2. Global Biotechnology Industry 2009 report by Datamonitor
3. Ernst and Young sector report on Biotechnology, 2009
4. Business Press
5. http://dbtindia.nic.in/index.asp
6. http://www.biocon.com/

Pratik Kadakia (Pratik.kadakia@tsmg.com) and Manjula Singh (manjula.singh@tsmg.com)

Petroleum, Chemical and
Petrochemical Investment Regions
(PCPIRs) and their impact
on Indian Chemical Industry
Current Indian Petrochemical Overview
Indian market for petrochemicals, 2009-14
(Mn tons) x% CAGR 2010
11.6% 12.3
9.2 % 10.1
0.9 1.8
4% 4%
6.5 7.1
0.7 10% 13%
Aromatics 1.5
9.2 10.5
5.8
Plastics 5.6
2009 2014 2009 2014

Demand Capacity
Source: Crisil, Roland Berger
The Indian petrochemical industry is expected to show robust growth in the coming
years, with a strong growth in plastics demand and domestic production.
In the 5 year period, from 2009 to 2014, domestic demand for plastics is expected to
grow at a CAGR of ~10%. In the same timeframe, India will also see a strong push in
petrochemical production capacity with plastic production being a key growth area.
The petrochemical production capacity is projected to grow by over 75% till 2014.
The strong demand and the even stronger push towards domestic production will
result in reducing the trade deficit in plastics by half.
Net trade surplus/deficit in petrochemicals

('000 tons)
-712 -358
68 PS
Net trade
637
PP
33
Surplus
Deficit
-24
-342 PVC
-885
-379
2009
-178
PE
Source: Crisil Research 2014

Current Issues Of The Industry
The Indian petrochemical industry has a strong advantage in terms of proximity to the
domestic market. However, feedstock availability and feedstock cost are the major
2010 issues faced by the industry.
Prices of olefins - estimated delivered cost

(USD/ ton)
1,200
1062
1,000
800
600 562
468
400
283
200
0
Middle East South East Asia
2008 2009
Source: Deutsche Bank, CMAI Global, Roland Berger
Cost of feedstock is significantly higher in India compared to the Middle East.

Deregulation of gas prices has resulted in the petrochemicals sector having no
relative advantage for sourcing of gas.
Indian petrochemical facilities are comparable to Asian countries in terms of scale of
operations but significantly smaller than those found in the Middle East and hence
face a disadvantage in terms of economies of scale. Also, the investment needs per
tonne is higher in India due to higher interest costs and duties on capital goods. This
is only partially offset by low labor costs.
Middle Eastern Isolated Indian

industrial complex production facility
Large area, more Relatively small area,
than 200 km2 <50 km2
Integrated on-site Other
facilities complementary
Area Port facilities not on-site
Water & power
plant
Gas pipeline
Many plants
High capacity
Plants/ Entire complex is At most, a handful of
capacity upward and plants with medium
downward integrated to medium-large
in production of capacity
petrochemicals
Large workforce Small workforce
>5,000 comprised of <1,000
Workforce officials,
professionals and
workers

Continuing Challenges
Excess capacity currently exists in petrochemical production facilities globally, resulting in
lower utilization rates. Also, significant capacity expansion, particularly in the Middle
East, is expected to maintain the utilization rates at low levels. 2010
Global polyolefin production capacity1 by region, 2009
(Mn tons)
Asia ex. 78% 79% 21% 91.8
Japan &
22% 63.3
India
India 90% 5.6 90% 10.5

85%
10% 15%
North 83% 17% 37.9 90% 37.5

America 10%
Western 78% 22% 33.5 83% 30.8
Europe 17%
Middle East 77% 23% 18.0 84% 32.1
2009 2015 16%
Nameplate capacity not utilised

Petrochemical production
Note: 1) Only includes HDPE, LLDPE, LDPE, Polypropylene, PVC and Polystyrene
Source: Deutsche Bank, Crisil Research, Roland Berger
Global oversupply will increase pressure from manufacturers focused on exports,

especially from the Middle East, constraining the export ability of Indian players.
Delivered cash costs to India - illustrative
(USD/ ton)
Cost advantage
Tariff
Distribution
Other1)
Labour
Raw materials
& utilities
Middle East India
Note: 1) Includes fixed costs and cost of capital

Source: Roland Berger, Tata Strategic
Also, strong competition from these players, who enjoy a low cost base, will result in
increasing margin pressures for Indian producers.

Way Ahead - PCPIRs
The PCPIR (Petroleum, Chemical & Petrochemical Investment Region) policy was
envisaged to promote investment and make India an important hub for both
2010 domestic and international markets. PCPIRs are specifically delineated investment
regions with an area of around 250 sq km and planned investments of greater than
USD 15-20 Billion. The processing area consists of a minimum 40% of total specified
area (i.e. 100 sq km) while the non-processing area would form maximum 60% of
total specified area (i.e. 150 sq km). Non-processing area would have residential,
commercial and other establishments benefiting the people residing and working in
the region.
Investments of over USD 280 Bn have been planned across the three approved
PCPIRs, Bharuch, Visakapatnam and Haldia and the three planned PCPIRs namely
Mangalore, Cuddalore and Paradeep.
Impact of PCPIR
The integrated approach via the PCPIR route could help India redefine the rules of the
petrochemicals game and overcome its feedstock disadvantage.
Current status of PCPIRs committed funds and provisions in total area [km2]
Mangalore, Karnataka Haldia, West Bengal

> Investment: USD 22.2 bn > Investment: USD 18.8 bn
> Anchor tenant: MRPL/ONGC > Anchor tenant: IOC/Spice
> Details: refinery expansion; > Details: refinery; hydrocracker-
petrochemicals & LNG based existing refinery
complex; C2, C3 extraction
Bharuch, Gujarat Paradeep, Orissa

> Investment: USD 68.8 bn
> Investment: USD 23.4 bn
> Anchor tenant: IOC
> Anchor tenant: ONGC/GSPC 264
> Details: refinery,
> Details: petrochemicals; LNG 453
284 petrochemicals
complex; C2, C3 extraction
Cuddalore, Tamil Nadu 604 Visakapatnam, AP

> Investment: USD 60.0 bn > Investment: USD 88.0 bn
> Anchor tenant: Nagarjua Oil 300 > Anchor tenant: HPCL/ONGC
Corp > Details: refinery and expansion
> Details: refinery; naphtha 252
Approved PCPIR
cracker
Planned PCPIR
Source:Tata Strategic Management Group
Economies of scale
PCPIRs can deliver economies of scale to close the cost gap and make Indian
producers more competitive. The cost savings are accrued on account of reducing
average fixed costs, joint sourcing agreements for power & water utilities and sharing
of logistics infrastructure. Higher level of integration at one site also results in
reduced distribution costs.
This coupled with an inherent labor cost advantage, while not providing for tariffs,
could potentially create an advantage in exports for the Indian petrochemicals
industry.

Cash cost of supplying to Indian market
(USD/ ton)
Cost
Advantage
2010
India pre-PCPIRs Middle East India post-PCPIRs
Tariff on Indian exports Distribution Labour

1
Tariff Other Raw materials and utilities
Note: 1) Includes fixed costs and cost of capital

Source: Roland Berger, Tata Strategic
Downstream chemical development

Ethylene versus VAM capacity increase [%]
25 LAGGED SPIKE IN GROWTH
20 VAM
15
10
2005 2006 2007 2008 2009
Source: Deutsche Bank, CMAI, BMI, Roland Berger
New petrochemicals clusters could also serve as a nucleus for further downstream
chemicals development as was seen in China post 2005, which saw a dramatic
increase in ethylene production capacity. This was further augmented with
development of coal based methanol plants.
Three years after this, a sharp spike was seen in VAM (Vinyl Acetate Monomer)
capacity, highlighting the fact that development in downstream chemicals is
encouraged by greater capabilities in basic petrochemicals.
Potential Risks
The largest potential risks to the success of PCPIRs are FDI availability and feedstock
security. Delays owing to global economic crisis and subsequent international
shortage of FDI could derail the growth track. Despite large domestic gas reserves
being found, feedstock availability and security still remains a concern. Further delays
and issues in land acquisition and inadequately meeting environmental concerns can
disrupt the mega investment plans.

Success Factors
PCPIRs can succeed if there is further participation and improvement in cost
competitiveness. PCPIR attractiveness can be improved by fiscal policies and
2010 incentives such as duty exemption on capital goods, extra support through
information and technical expertise and offsetting agreements. Availability of
financing can provide an impetus to private investment. Also, development of
dedicated industrial training institutes can help build a strong supply of technically
skilled manpower. Costs can be further made competitive through increasing scale of
operations and attracting further downstream investments close to PCPIRs.
Deployment of world class technologies through JVs with leading companies of the
world, similar to the Saudi Arabia-China model, can help in technical/ operational
know-how and in some case benefit with access to the developed markets.
In conclusion, PCPIRs can deliver economies of scale to close the cost gap and make
Indian producers more competitive. PCPIRs can be the proverbial 'Philosopher's
Stone', providing world class infrastructure facilities at lower costs and also
tremendous business potential and growth to the petrochemical players.
This note is based on a presentation made by Tata Strategic Management Group/ Roland Berger Strategic Consultants
(RBSC) and delivered by Dr. Thorsten Ploss, Partner - RBSC at Polymer update Global Petrochemical Conference,
Mumbai, Aug 2010.

Process Plant and Machinery
Industry Overview
The process plant machinery sector in India is a heterogeneous industry catering to a
wide range of process industries like oil and gas, petroleum refining, petrochemicals,
chemicals, fertilizers, pharmaceuticals, metal processing, cement, paper, sugar, food 2010
processing and water treatment.
The industry at present is equipped with modern machinery, in addition to competent
engineers and workers, and is producing sophisticated equipments and systems such
as: high pressure reactors, pressure vessels, columns, towers, heat exchangers, multi
tubular reactors, evaporators, crystallizers, dryers, road/rail tankers, storage
equipments, mineral beneficiation equipments, rotary kilns and separators, etc. for
the domestic as well as the global markets.
The process plant and machinery industry has evolved primarily on the basis of the
requirement to set up core process industries in India post-independence. It had its
genesis through the various public sector units set up under the aegis of the
Department of Heavy Industry during the early 1950's and 1960's. Subsequently as
the liberalization policy was pursued by the government, private sector companies
like L&T (HED) and Godrej & Boyce (PED) ushered in the next phase of growth for the
industry.
Liberalization has helped the sector, granting it access to global markets. The industry
today is equipped with state of art processes to engineer and fabricate various
complex process equipments across different grades of materials of construction. The
plant sizes of these process industries have also increased and at times are
comparable or even larger than global plant capacities.
Industry Structure
Pvt. Ltd.,
16% Closely
held pvt.
Ltd., 29%
PSU, 7%
Partnership
firms, 6%
Public Ltd.,
42%
Source: Secondary Research
The Indian process plant and machinery industry has grown over the years at a rate of
6-10% p.a.
Industry Landscape
Process plant & machinery is a highly capital as well as labor intensive sector with a
strong engineering orientation and products are mostly custom built. Hence
economies of scale have less relevance.

1
Project cost breakup
Other
Costs, 28%
2010
Equipment and
machinery,
60%
EPC, 12%
Note: 1) excluding land cost

Source: Primary Research, Secondary Research
Being heterogeneous, the industry is also very fragmented. Industry studies show
that majority of the players in this sector are in medium sized category and only 6% of
companies fall in large category holding a market share of 43 percent. These
companies operate on a higher technological platform compared to the others based
on their expertise and infrastructure facilities.
Chemical Machinery market Share (2008)
Others, 18.80%
Bharat Heavy Larsen & Toubro,

Electricals, 3.36% 40.23%
Alfa Laval (India),
3.61%
Tema India, 4.43%
Saraswati
Industrial
syndicate, 4.58%
GE I Industrial
Systems, 4.91% Godrej & Boyce
Bharat Heavy Plate
and Vessels, Mfg. Co., 13.92%
6.16%
Source: CMIE, 2009
The major hubs for process plant and machinery industry in India are at Delhi-NCR,
Maharashtra and Gujarat.
International companies have started their operations in India through joint ventures
like Atlas Copco, Alfa Laval, J.L. Smith, Sulzer etc. Others have tie ups with renowned
Indian equipment manufacturers and are considering making India as their
manufacturing hub for exports.
Internationally renowned consultants in process industries like Flour Daniel, Bechtel,
Foster Wheel, LG, Daelim, Jacobs, Uhde and Toyo engineering have offices in India.
They are increasingly using the Indian process plant manufacturer's expertise in
engineering and manufacturing for outsourcing. Indian companies are also
positioning themselves as a low cost manufacturing hub by aligning themselves and
working together with these consultants.
Trade
India is benefiting from the globalization of the chemical market due to its lower cost
structure, high domestic demand and close proximity to other Asian countries. A few
companies have made a mark in the export arena due to their manufacturing skills
and quality.

Exports account for ~30% of the domestic production though the export orders were
sharply down in the last two years due to deferment/ cancellation of planned projects
across geographies.
India's major export markets for process plant include UAE, Saudi Arabia, Nigeria,
Kenya and Vietnam. There is intense competition for business from Korea, China and
2010
Italy.
TRENDS
Market
As the Indian chemical industry integrates with the global chemical industry, the
present day plants are far more complex and larger in capacity. The Indian process
plant and machinery sector is geared to take up these challenges and has built
capabilities to manufacture very large equipments that weigh up to 1,200 tons to
towers that are more than 100 meters long.
Indian companies are now moving towards international expansions, e.g. L&T's joint
venture at Sohar, Oman for targeting the market in GCC countries.
With customers looking for a single supplier to avail end to end services, it is expected
that smaller players would play the role of sub-suppliers or sub-contractors to the
bigger players. Increase in percentage of bought-outs in total sales is indicative of this
trend.
Indian manufacturers are no longer confined to fabrication alone and have a strong
presence across the entire value chain. They are catering to the needs of the
customers, from design and engineering at the back-end to erection and
commissioning at the front-end and are competing with global majors for
Engineering, Procurement and Commissioning (EPC) contracts.
Value Chain End-to-end solution provider
Consultants
Raw material
Designing Manufacturing Customer
Supplier
EPC
Source: Tata Strategic Analysis
Raw material supplies are being secured through joint ventures. The domestic steel
industry has the challenge of meeting the requirements of the sector in terms of
availability of quality raw materials.

Equipment cost breakup
Other Other
costs Raw
materia
2010 45%
ls, 15%
Raw
materi
al
cost,
55%
Steel,
85%
Equipment Raw Material
Source: Primary Research, Tata Strategic Analysis
Development centers are increasingly working closely with customers for analyzing
plant performance and developing ways to improve plant efficiency. With
enhancement of quality standards and improvement in delivery schedules, India is
developing as a major outsourcing base for complete services right from designing to
commissioning. MNCs are using their Indian arms for outsourcing. Global acceptance
for Indian goods is increasing with improving quality and adoption of international
standards and processes.
Technology
There is an increasing focus on continuous development of manufacturing technology
and new products as well as modification of existing products. Up-gradation is
important to have a competitive advantage.
Companies have equipped themselves with modern machinery and state of the art
facilities to face increasing international competition. They are acquiring international
standards such as ISO, ASME, CE, etc. to improve productivity thereby reducing costs
and improving upon the delivery period. MNCs are bringing newer technologies and
processes from within the organization's established foreign arms.
Companies are focusing on increasing tie-ups and partnerships for technology
transfer but these are limited due to unclear IPR definitions.
Improving operational efficiency is a prime area to target during current times so as
to be better equipped when industry growth picks up again. This is being done
through various measures such as automation of design and drawing activities for
reducing the cycle time and improving quality of the design & engineering processes.
Automation in manufacturing and operations is also a key area for improving
efficiency. Companies are also making use of IT enabled re-engineering to improve
systems and processes.
Industry has been working on financial management to become cost effective. As a
result, the percentage of working capital to sales has been on a steady decline.
Companies are stressing on improving talent acquisition and retention to enhance
organizational performance. Initiatives are in place for skill/capability building
including tie-ups for training, knowledge sharing and up gradation.

Regulatory
Import duty is very low at ~7.5% but domestic taxes and duties are high. Hence
importing equipments and machinery is very convenient for the industry which has
increased competition for the domestic equipment manufacturers. 2010
On the raw materials side, the local steel manufacturers are lobbying to impose anti-
dumping duty on the import of steel, making it more expensive.
Increasing competition along with increasing raw material prices is putting pressure
on the margins of process plant and machinery industry.
Risks And Challenges

In its quest to serve the entire value chain the PPMI has exposed itself to higher risks
including commodity steel prices and penalties associated with delays.
Lack of infrastructure poses a serious threat as delay in deliveries and schedule is
mostly attributed to delay in transportation of raw materials from supplier or finished
goods to customers. The lack of port infrastructure, leading to higher transaction
costs and freight costs, is impacting margins.
Power shortage is another reason for inability to meet timelines (Power consumption
to sales ratio in PPMI is higher than other manufacturing industries since the products
manufactured have higher component of fabricated items).
Future Outlook
In 2009, the Indian process plant and machinery industry was active, in spite of the
global slowdown. This was because of execution of planned government projects. In
the near future, the market is expected to show marginal reduction in growth rate
due to the decline in number of available projects. Also, on-going new projects are on
verge of completion and pace of work in new projects has slowed down in the past 2
years.
Future growth is expected in efficiency improvement and de-bottlenecking projects
for sectors like Petrochemical, Refining & Oil and Gas.
Expansion projects as well as green field setups are expected in sectors like fertilizer.
However, developments are dependent on clarity in government policies on subsidies
and natural gas.
Indian process plant and machinery industry1
23,000
(Rs. Cr.)
16,000
10,000
2005 2010 2015

Note: 1) Includes replacement market (~20-25% of the total market)
Source: Primary Research, CII, Tata Strategic Analysis

Strategy
Reduced active projects coupled with competitive market conditions might increase
the pressure on margins in new projects. Companies need to differentiate their
2010 offerings by improving quality of products and providing more services along with
equipments.
Improvement in productivity and capacity utilization can be achieved by continuous
improvements in processes and operational methods. Companies could focus on best
practices to reduce their manufacturing costs and improve quality standards.
Since raw materials are a major cost component of the equipments, companies could
invest in IT systems to integrate their supply chain, thereby reducing inventory levels
and ensuring cost effective procurement methods.
To compete in the industry, companies could provide high quality and service, reduce
costs, increase product range and involve in aggressive sales & marketing to build a
brand image. Strategic alliances are required from time to time for new product
development.
The process plant and machinery manufacturers have the right mix of talent &
expertise and the opportunity to grow at a fast pace if the much needed investment
in the core infrastructure industry takes place. A re-look at operational and
management efficiencies can help industry participants bring a competitive
advantage and succeed in this industry.
References
1. CMIE report, Industry Market Size & Shares, April 2009
2. CII - Department of Heavy Industry, report on the Indian Capital Goods Industry
3. EXIM report, Indian Capital Goods Industry, June 2008
4. Business Press
5. Company Annual Reports

Pratik Kadakia (pratik.kadakia@tsmg.com), Ashwin Rao
(ashwin.rao@tsmg.com) and Deepti Gupta (deepti.gupta@tsmg.com)

Thought Notes
Indian Chemical Industry -
The Road Ahead
The growth story for the Indian chemical industry remains intact. However post
downturn, domestic chemical companies across different segments are likely to face
stiff competition either from imports or global giants manufacturing locally to serve
the Indian market. There is no common solution to counter such competitive pressures
as each segment has different critical success factors. Indian chemical companies 2010
would do well to tailor their strategy depending upon the segment in which they
operate, say Raju Bhinge, Chief Executive and Ankur Singhai of Tata Strategic
Management Group
The worst is behind us

India's chemical industry has come a long way, growing from USD 28 Bn in FY03 to
USD 42 Bn in FY09. While it grew at about 7.5% per annum from FY03 to FY08, the
recent economic downturn slowed down the growth momentum considerably. As can
be seen in Figure 1, only 5.0% growth was recorded during the FY08-09 period, that
too on account of the stimulus package announced by the government of India.
However, going by the IIP data for the period Apr'09 - Jan'10, the Indian chemical
industry has bounced back strongly, growing at about 11.5% during FY09-10.
Figure 1: Past growth of Indian chemical

industry and the segment breakup
Indian chemical industry (USD billion) Segment share (%)
CAGR
7.5% 5.0%
Knowledge
chemicals
18%
40
40 42
42
57%
28
28 Specialty 25%
Basic
chemicals
chemicals
FY2002-03 FY2007-08 FY2008-09

Tata Strategic Management Group
The chemical industry primarily comprises of three segments namely basic chemicals,
specialty chemicals and knowledge chemicals. Basic chemical with ~57% share is the
largest segment followed by specialty chemicals at 25% and knowledge chemicals at
18%. This has largely remained unchanged over the past few years.
Each segment is different, with its own unique set of challenges and opportunities.
Therefore each of these segments needs to be looked at in greater detail to
understand what the future has in store for Indian chemical companies.
Figure 2 : Indian Petrochemical demand supply projections

Indian Petrochemical demand (in CAGR Indian Petrochemical supply (in CAGR
million tonnes) (FY10-14 million tonnes) (FY10-14
5.8 12% 14%

5.0-6.0
5.0 -6.0
3.3
3.3
4.1
11
11 10% 11.0-12.0 10%
7 7
FY2009-10 FY2013-14 FY2009-10 FY2013-14

Olefins Aromatics Olefins Aromatics

The chemical industry primarily comprises of three segments namely basic chemicals,
specialty chemicals and knowledge chemicals. Basic chemical with ~57% share is the
largest segment followed by specialty chemicals at 25% and knowledge chemicals at
18%. This has largely remained unchanged over the past few years.
2010
Each segment is different, with its own unique set of challenges and opportunities.
Therefore each of these segments needs to be looked at in greater detail to
understand what the future has in store for Indian chemical companies.
Basic chemicals
Petrochemicals (Olefins and aromatics) form the backbone of basic chemical industry
with more than 60% share by revenue. As illustrated in Figure 2, olefins demand in
India is expected to grow at 10 % per annum while aromatics demand is expected to
grow at 12% per annum over the next four-five years. High GDP growth (7%-8% per
annum) and increase in real per capita income (6%-7% per annum) will drive the
demand in key end use industries like automobiles, consumer durables, textile,
packaging and real estate, thereby stimulating the demand for petrochemicals.
As global majors across diverse industries like auto and consumer durable set up
manufacturing facilities in India, downstream polymer processing industry is also
evolving into a more organized market. On one hand multinationals like Austrian
Alpla (Packaging industry) and Italian Meccaferi (Non woven geo-textile) are making a
mark in the domestic market while on the other hand domestic companies like Jain
Irrigation and Essel Propack are trying to create a global footprint. This will further
drive the demand for petrochemicals in India.
High growth prospects have led to many companies announcing plans to set up
domestic capacity close to market. Reliance Industries recently announced plans to
set up a 1.3 Mn to 1.6 Mn tons per annum cracker at Jamnagar by 2014. Similarly
Indian Oil and ONGC are setting up petrochemical facilities which are expected to
come online in 2010 and 2013 respectively. Further, availability of captive feedstock
like Naphtha & refinery off-gases and infrastructure support through development of
Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR) are incentivising
companies to invest in petrochemical capacities.
However Indian companies should take note of the wave of petrochemicals capacity
(over 13 Mn tons) coming up in West Asia in the next four-five years. Most of this
capacity is based on low cost gas feedstock which can render naphtha based
complexes uncompetitive. Already plagued by overcapacity, many European
capacities like the one at Wilton, Teesside chemical cluster are being closed down.
Besides, owing to proximity to India, West Asia companies will target the Indian
market. This is a major risk for Indian chemical companies looking to invest/ expand
their petrochemical business.
As shown in Figure 3, six factors would define the success of Indian petrochemical
industry in future. Indian companies will have to review their capabilities along each
of these dimensions. They should leverage high growth domestic market and focus on
securing access to low cost captive feedstock and world scale capacities to have a
meaningful play in the petrochemical market.

Figure 3 : Critical Success factor for India petrochemical industry
Economies of Costs (feedstock
scale and fixed costs)
Critical success
factors
2010
Infrastructure affecting the Global demand
supply situation
indian
petrochemical
industry
Downstream and Domestic

upstream demand supply
integration situation
Other sub-segments like inorganic chemicals and fertilizers also operate on similar
principles. Since the basic chemical segment is mainly commoditized, any company
would have to strategize around either being well entrenched in the market
(domestic or global) or have a global scale or have access to low cost feedstock or a
combination of these to sustain competitive advantage.
Figure 4 : Critical Success factor for India petrochemical industry

END USE MARKET GROWTH PROJECTIONS [% p.a.] IMPACT OF SLOWDOWN
Textiles 12 Severe (Exports constitute 40-50%; badly affected)

20
Construction 9 High-moderate (Housing slow down, infrastructure projects

15 stalled)
Glass 10 High-moderate (Housing/ automotive slow down)
14
Paints 7 High- moderate (Housing/ automotive slow down)

12
6 Severe (Cut on discretionary expenses, high interest rates
Automobiles 12 cars expensive liability, some respite due to launch of smal
cars)l
Leather 12 Severe (Exports affected)
17
Paper 7 Low-moderate
9
Personal Care 10 High-moderate (Cut on discretionary expenses)
15
During slowdown Pre-slowdown Tata Strategic Management Group
Specialty chemicals
The demand for specialty chemicals industry is driven by a wide range of end use
industries. Thus as depicted in Figure 4, global economic slowdown has impacted
adversely the growth of the key consumer industries and consequently the specialty
chemicals industry in India. Not all segments were equally affected. Chemicals being
supplied to consumer industries with relatively higher export dependence e.g. textiles
witnessed a much steeper decline in growth as compared to chemicals for industries
like paper where domestic demand has a predominant share in the overall demand.
However the fundamental shape of the Indian specialty chemicals growth curve has
not altered significantly. It is expected to return to pre-slowdown growth rates of ~15
% p.a. in one-two years as shown in Figure 5.

Figure 5 :Specialty Chemicals Growth Projections INDICATIVE
Demand ~4-8 quarters projection

(NOT TO SCALE) shift
Pre-downturn growth projection
2010 CAGR: 15-17%
Inv. adj/
Past growth curve demand Post-downturn
CAGR: 11-12% slowdown growth curve
CAGR: ~15%
Opportunity to
review strategy
and build capability
Slowdown, demand Post recovery
Pre slowdown contraction & recovery Time-year
end (NOT TO
2002 2007 2008 2009 2010 2012 SCALE)
Post slowdown some of the key end user industries such as auto, construction and
consumer electronics are estimated to grow at an even faster pace. Besides, a
number of new applications in each of these sectors will also contribute to growth.
e.g. Auto industry is expected to grow at 9% per annum during the next five years
from 11.25 Mn units in FY08-09 to 17.12 Mn units in FY13-14. Moreover emerging
trends like demand for cost effective fuel efficient cars is driving the usage of
performance plastics in cars which in turn would require specialty chemicals like anti-
oxidants to provide thermal stability.
While the growth story for specialty chemicals has returned post downturn, the
competitive landscape has changed, which domestic companies should take
cognizance of. Specialty chemical industry has seen consolidation with global majors
like BASF and Dow entering the specialty chemical space by acquiring Ciba and Rohm
and Haas respectively. Thus BASF which till now was supplying performance plastics
to auto industry would also start supplying specialty chemicals. As a result the
domestic specialty chemicals companies will face a much bigger and stronger
competitor in the market.
Companies need to address four key dimensions to compete successfully in India's
specialty chemicals industry. They are as shown in Figure 6.
Figure 6 : Important factors for success in specialty chemical markets

2
Low cost application

development capability:
Frugal innovation
Strong relationship with key COMPETING SUCCESSFULLY Cost leadership 3

end use industries: IN INDIAN SPECIALTY
1 Understanding of needs CHEMICALS INDUSTRY
Leverage local upstream

chemicals supply

Emerging trends in consuming industries call for development of unique local
products/ solutions based on an understanding of Indian customer. This factor is
critical for companies supplying to the whole spectrum of end user industries.
Automotive industry requires chemicals to support emergence of India as a low cost
small car hub and green-tech features. Creating products to support growing demand
2010
for ultra low-cost housing projects and green buildings is critical for the growth of
construction chemical companies. Likewise demand for environment friendly crop-
protection solutions/GM crops and processed food creates new opportunities for
agro-based chemical companies. Growth of renewable energy sector is increasingly
creating new customer segments for chemical players.
Knowledge chemicals
Knowledge chemicals mainly consist of pharmaceuticals and agro-chemicals. These
segments were relatively unaffected by economic downturn. Domestic pharma
market was estimated to be USD 7.5 Bn in FY2009 and have a CAGR of 14.0% during
the period FY08-09 to FY13-14. Besides domestic sales, export of generic drugs and
active pharmaceutical ingredients by Indian companies adds another USD 11 to 12 Bn
to the pharma market. Similarly the domestic agrochemical market was estimated to
be USD 900 Mn in FY2008-09 with another USD 300-400 Mn exports. The domestic
agrochemical market is expected to have a modest CAGR of 7.5% during the next
four-five years. Both the sub-segments in knowledge chemicals industry have
witnessed similar life-cycle trends. It started with a focus on low cost export of
generics and gradually moved on to developing contract manufacturing
opportunities. Currently the contract manufacturing market presents a USD 2 Bn
opportunity for the Indian pharma industry and is likely to grow at 25%-30% per
annum over the next two-three years. Similar opportunities exist in agro-chemical
space. Rallis has invested Rs.150 crores in a plant at Dahej in Gujarat for contract
manufacturing of agro-chemicals for its global partners.
Even as India boasts of the highest number of US FDA plants, ANDA (Abbreviated New
Drug Application) and DMF (Drug Master File) filings outside of US, it is facing stiff
regulatory pressures in those developed markets. In contract manufacturing market
too, China is following closely on the heels of India. The agrochemical market in India
already has global majors like Monsanto, BASF and Dow competing with local
companies like United Phosphorus and Excel Crop Care
Thus Indian knowledge chemical companies may need to focus on the following three
parameters to become globally competitive:
1. Understand the exact need of the consumers
2. Increase R&D efforts to develop new molecules
3. Develop high quality low cost manufacturing facilities from lab scale to ton scale

Conclusion
Three common themes are emerging across the segments:
2010 1. Domestic market continues to offer high growth opportunities

2. Competitive pressure is increasing both from imports and from global majors
setting up manufacturing facilities in India
3. There has to be an ongoing focus on lowering costs
Thus in order to successfully tap the high growth domestic market while keeping the
competition at bay, Indian chemical companies will have to tailor their strategies
along the critical dimensions depending upon the segments in which they operate.

IM&A opportunities in
Chemical Industry
Introduction
Indian chemical industry is estimated to be ~USD 83 billion in 2010 which is around
2.5% of the global chemical industry. Though global chemical industry grew at around
9% p.a from 2004 to 2008, industry went through a dramatic downturn in 2008-09 2010
due economic slowdown. Demand from large end-use industries like construction,
automotives, electronics, etc. dropped by 4-5% of its 2008 levels. Post 2009, as global
economy has started recovering, chemicals industry is starting to register volume
growth due to restocking and revival of underlying demand.
Driven by domestic demand, Indian chemical industry has been resilient and quick to
recover from the effects of global economic slowdown. Indian chemical industry is
expected to grow at 10-12% p.a to reach ~USD 130 billion by 2015. Specialty
chemicals and pharmaceuticals are expected to grow at much higher rates than
global counterparts. Low per capita chemicals consumption and growing middle class
are the key drivers for sustained demand growth in end-use industries.
Growth rate of select segments:
Indian chemical industry, 2010 2010 to 2015
India USD 83 Bn. Biotech 22.7%

2.5% 9.6%
2.5 Biotech
2 Agro Chem
Agro Chem 7.5%
15 Spec Chem 3.5%
Spec Chem 15.0%

20 Pharmaceuticals 3.4%
Pharma 18.0%
6.0%
Rest of
World 9.0%
97.5% 44 Base chemicals Polymer
4.0%
Fertilizers 4.0%
3.0%
2010 Global India

Source: SRI Consulting, Tata Strategic Analysis
Resilient and growing economy along with ease of doing business, favorable
government policies and matured financial markets are the key drivers for global
companies' increasing presence in India.
Drivers For M&a In India

Inbound and domestic mergers & acquisitions (where target is an Indian company)
have significantly different drivers than outbound M&A (Indian company acquiring
assets outside India).
Drivers for inbound and domestic M&A

Global chemicals companies are keen to establish their presence in India to
participate in growing market which is providing significant growth opportunities.
They are looking towards merger & acquisition route to derive first mover advantage
or to catch up quickly with established companies. Similarly, global companies with
India presence and large domestic companies are going for mergers & acquisitions to
increase their market presence, product portfolio rationalization and cost
optimization.

Driver 1: India entry
Many global companies have started believing India growth story and are keen to
actively participate in it. Indian markets have been growing significantly and have
2010 become too large to ignore now. In addition, cost advantage due to cheaper raw
material & skilled workforce makes manufacturing in India a profitable proposition. To
enter Indian markets, Japan's 3rd largest drugmaker Daiichi Sankyo acquired majority
stake in Ranbaxy, one of India's largest and fast-growing pharmaceuticals company.
This acquisition provided the much needed break to Daiichi into Indian markets which
went on to acquire Zenotech laboratories in 2010 to increase its presence.
Driver 2: Increase market share in India
Many of the recent domestic and cross-border acquisitions in Indian chemicals
industry have been done to gain access to new markets. Specialty chemical industry
in India in highly fragmented with local players dominating regional markets. Large
domestic and global manufacturers have opted the M&A route to acquire these small
players to gain access to regional markets and increase their presence.
In May 2010, global healthcare company Abott Laboratories acquired domestic
pharmaceuticals company Piramal's healthcare unit for USD 3.72 Bn to make it a
leader in pharmaceuticals. Acquisition increased Abott's market share significantly
along with boosting its manufacturing capabilities.
Driver 3: Product portfolio rationalization
It is one the key reasons for mergers and acquisitions in chemical industry. Chemical
industry is highly technology intensive and R&D driven. New products have high
gestation periods and require huge investments in R&D. It becomes difficult for late
entrants to catch up with early-movers who have created a niche for themselves.
Acquisition of an already established company with supplementary product portfolio
becomes preferred way to widen product portfolio and realize synergies like common
markets or reduced costs.
For example, DuPont subsidiary Pioneer Hi-Bred, which offered corn, rice, pearl
millet, sunflower and mustard seeds in Indian markets, acquired Nandi Seeds in 2009
to get into BT and hybrid cotton seeds market. Acquisition was aimed at enhancing
DuPont's product line up. Similarly, Piramal acquired leading contraceptive brand I-pill
from Cipla to strengthen its Over the Counter (OTC) portfolio.
Driver 4: Increase presence along value chain
Backward integration to acquire feedstock sources and forward integration to acquire
channels and downstream players are preferred ways of deriving value from
integrated value chain. Secondly, specialty chemicals become commodities in a
relatively short span of time. To maintain profitability, increasing presence along the
value chain becomes preferred strategic option.
Driver 5: Cost reduction & economies of scale
Post economic slowdown, focus has been on cost management with re-evaluation of
portfolios and deriving synergies for cost reduction. Improved sourcing of raw
materials, better production management and common customers are key
economies of scale which chemical companies can derive from alliances/ acquisitions.

Drivers for outbound M&A
In parallel, domestic chemical companies are looking outwards for foreign
acquisitions to grow and compete successfully in global markets. Establishing global
presence, entering new markets, feedstock security and latest technology are key 2010
drivers for outbound acquisitions by Indian companies.
Driver 1: Global aspirations
Driven by success in Indian markets, large Indian chemical companies like Tata
Chemicals, United Phosphorous, etc. are keen on increasing their global footprint.
Tata chemicals acquired General Chemicals in 2008 to become world's second largest
soda ash producer. Similarly, Indian oil & gas companies (IOC, ONGC, HPCL, etc.) are
acquiring assets globally to increase their global presence.
Gaining access to growing Latin American and African markets is another key driver
for outbound acquisitions by domestic chemical companies. Acquisition of DuPont's
fungicide unit gave United Phosphorous access to growing South American markets.
Marico is in talks to acquire Singapore based Skin care firm to enter promising South
East Asian markets.
Driver 2: Cost optimization (Feedstock security)
Companies which are dependent on volatile commodities as feedstock prefer
backward integration to own feedstock source. In 2005, Tata Chemicals and Chambal
fertilizers acquired one third stakes in Indo Maroc Phosphore S.A. to hedge against
the price volatility in phosphorous markets. Acquisition also provided Tata Chemicals
a reliable and cost-effective supply of phosphorous.
Driver 3: Acquire niche technology or market
Large Indian companies are looking outside India for strategic niche acquisitions to
acquire intellectual property, technology and technical know-how. Acquisition of
shale gas assets in US by Reliance Industries Ltd is a strategic decision to acquire shale
gas extraction technology. In addition, acquisition might provide RIL the first mover
advantage in India Shale gas exploration. Piramal Healthcare Ltd has gone into
definitive agreement to acquire Canada's BioSyntech Inc for USD 3.78 Mn to gain
access to patented technology used to repair damaged tissue like cartilage, bone and
chronic wounds.
Outbound alliances/ acquisitions are also driven by changing regulatory environment
in developed economies. Implementation of Registration, Evaluation, Authorisation
and Restriction of Chemical substances (REACH) regulation in European Union can
have a significant impact on exports of chemicals from India. Indian chemical
companies are strategically acquire assets or going into an alliance with existing EU
chemical companies to sustain their exports markets.

GROWTH THROUGH ACQUISITIONS: UNITED PHOSPHOROUS LIMITED
United Phosphorus Limited (UPL)
incorporated in 1969, is a leading global UPL revenues
2010 producer of crop protection products,

intermediates, specialty chemicals and other
(Rs Cr.)
5300
industrial chemicals. p.a
35% p.a
UPL has successfully used global mergers &
acquisitions as an opportunity for growth and
increase share holder value. It has made 26 1650
acquisitions in last 15 years and most of them
500
have recovered investments in less than three
years. The buyouts have been across the 2002 2006 2010
world, from the US and the UK to South
Africa and Netherlands. Many of the UPLs
buyouts have been from global leaders in of these acquisitions. In addition, some
chemical industry like Bayer and DuPont. of acquisitions helped UPL acquire
registrations in these economies
Access to new geographies and new products
successfully.
were the key drivers for most
UPL acquisitions-timeline
AgroDan Denmark Cequisa, Spain Evofarms

Reposo- columbia
argentina
Fungicide
Devrinol,USA
AgValue,USA business,
DuPont
Advanta BV, Netherlands
Agricola, UK
MTM-Agrochem, UK CorpServe,SA
Cerexagri
1990 1995 2000 2005 2010
Source : Secondary research,UPLwebsite
Characteristics of M&A in India

Value of merger and acquisition (M&A) deals in India rose to USD 33.6 Bn till third
quarter of 2010, up from USD 17.8 Bn in whole of 2009.
Though telecommunications services, energy and Oil & Gas are the key sectors
witnessing mega M&A deals, chemical industry has kept pace with many small sized
acquisitions. With 242 deals in last decade, chemical industry accounted for more
than 14% of the total deals in top 10 sectors in India, whereas it accounted for only
4% by value of total deals.

43.9
India M&A deals (USD Bn)
33.5 33.6
30.9 2010
18.6 17.8
7.0 7.8
5.7
3.9 3.9
2000 2002 2004 2006 2008 2010Q3

Source: Bloomberg
Indian M&A: Top 10 sectors by value Indian M&A: Top 10 sectors by volume
(2000-10) (2000-10)
Chemicals Engineering
4% Alt EnergyOil & Gas
Software 3% Oil & Gas 2% 6%
Engineering
6% 15%
10% Telecom
Financial 12%
Services
8% Chemicals
14%
Metals
4% Pharma
13%
Electrical
6%
Software Electrical
Pharma Telecom 18% 10%
10% 44%
Financial Metals
Services 8%
Total (2000-10): USD 206 Bn. 7%
Top 10 sectors: USD 134 Bn.
Total (2000-10): 4,754 deals
Top 10 sectors: 1,700 deals
Source: Bloomberg, Analysis by Tata Strategic
Till third quarter of 2010, India has witnessed more than 400 M&A transactions with
average deal size across industries of USD 82 Mn. In contrast average deal size in
chemical industry was ~USD 12 Mn which was lowest as compared to other
industries. Annexure 1 lists major deals announced in chemical industry in India in
2010.
A comparison of M&A deals in chemicals industry reveals that though petrochemicals
and base chemicals have dominated M&A globally, fertilizer & agri-products and
specialty chemicals have also been the key focus for M&A activities in India.
Premiums for M&A deals in India have been consistently higher than global average
which highlights positive outlook for Indian economy among global investors.
Similarly, M&A deals in Indian chemical industry have received a higher premium than
global chemical deals.

M&A premiums in last decade - Global vs. India (%)
60%
2010 50%
40%
30%
20%
10%
0%
2002 2001 2003 2005 2007 2009
Premiums - India Chemcals Premiums - Global Chemicals
CSFs for successful alliance/ acquisition

Mergers and acquisitions involve significant risks leading to low success rates and
non-realization of synergies post-merger. Successful acquisition requires clear
strategic intent, perfect execution and well-planned integration. Failure in any of
these aspects could lead to non-realization of possible synergies and potential value
destruction. Successful alliance or acquisition should have three critical elements.
Clear strategic intent
An extensive self-assessment along with identification of market trends is essential to
shortlist the segment in which acquisition has to be done. Selection is primarily
driven by company's long term vision and attractiveness of the target segment.
Impact of domestic and global trends on shortlisted segments should be carefully
understood. Future growth prospects, volatility and sustainability of growth,
technological changes, changes in end-consumer industries, regulatory trends are
some of the key factors to be studied and understood before pegging on the
segments for M&A.
Having a clear strategic intent opens up broader set of acquisition opportunities. In
addition to publicly available targets for sale, there might be stand-alone companies
and business units of large conglomerates which might available for acquisition.
As an example, Piramal decided to focus on its core competencies of OTC drugs,
CRAMS and critical care segments. As a strategic move, it hived off its domestic
formulation business to Abott and acquired Cipla's I-pill brand.
Identify targets and corresponding synergies carefully

Once the attractive segments have been identified and prioritized, identification of
suitable partner/ acquisition target becomes critical. Possible synergies should be
mapped to the strategic intent. Much has been talked about over-estimation of
synergies which leads to over-priced acquisitions.

Key criteria typically used in assessing potential acquisition candidates include
strategic and organizational fit, past performance, growth potential and resource
requirements of the acquisition.
Exhaustive financial due-diligence of the target to validate the reported facts is
essential. This involves examining the financial statements, legal status, inventories,
2010
etc., with in-house and outside experts in these areas. Commercial due diligence is
required to ascertain the current business fundamentals and future potential.
Risk assessment & mitigation steps

Mergers and acquisitions are attached with significant risks on financial and strategic
fronts. Major acquisitions have significant strategic impacts and leave little scope for
errors. Risks involved extend financial scope and can impact existing work processes,
reduce customer confidence and employee motivation. According to a study, more
than 65% of mergers and acquisitions between 1979 and 1990 destroyed value for
the shareholders. Major risk factors are highlighted below:
Over-enthusiasm over synergies

Senior management sometimes over-estimates the acquisition benefits which are at
best perceived and left unquantified. Acquisitions for cost reduction generally face a
significant gap between possible and actually realized synergies. For example, there
are practical difficulties related to man-power reduction which could have been
identified as a potential synergy during alliance or acquisition. Transfer of best
practices and core competencies are hindered due to cultural factors.
Response of customers & suppliers

Impact of acquisition on current customers and suppliers for both target and acquirer
should be well understood. If acquisition is made to gain access to key customers of
the target, then willingness of the target's customers to retain the relationship should
be tested before acquisition. When Lockheed Martin acquired Loral in 1996, it lost
business from major customers of Loral such as McDonnel Douglous, which were
Lockheed's competitors.
Integration post acquisition

Many mergers and acquisitions fail at the integration stage. To mitigate the risks
during integration phase, operating strategy should be developed well before the
acquisition process. Integration of systems and people should be the key elements of
the strategy. Much talked about acquisition of Republic Airlines by Northwest failed
as two companies could not integrate IT systems quickly enough to realize synergies.
Organizational structure post acquisition should be decided and conveyed to target
management beforehand. Any uncertainties during the integration phase lead to
unwarranted fears regarding lay-offs, restructuring and reporting relationships.

CONCLUSION
Dynamism in Indian economy and favorable government policies are encouraging
global chemical companies to expand operations in India. On the other hand,
2010 domestic chemical companies are looking towards SE Asia, South America and Africa
for new markets and captive feedstock sources. Companies are preferring mergers
and acquisitions route to reduce the lead times to set up businesses in fast growing
economies. Though M&A route has definitive advantage of quick acquisition of
markets and know-how, it should be treaded carefully to realize full synergies.
Table 1: Major M&A deals in chemical industry in India
Acquirer Target/ JV partner Valuation Synergies/ Drivers
INBOUND
Piramals domestic Abott: Increased market share;
May-10 Abott Laboratories USD 3.72 Bn
formulations business Piramal: Focus on core business
Aug-10 Daiichi Sankyo Zenotech USD 17 Mn Quickly increase India presence
OUTBOUND
Acquire technology Increase global
Aug-10 RIL Carrizo Oil & Gas NA
presence
Raw material access

Jul-10 Shri Renuka Sugars Equipav S.A NA Technology
Market access
Singapore based Skin
May-10 Marico NA Opening into SE Asian markets for Marico
care firm
UPL: Access to South & Central America

Jun-10 United Phosphorus DuPonts fungicide NA markets
business
DuPont: Focus on core business
May-10 Piramal BioSyntech, Canada USD 3.7 Mn Piramal: Access to technology
DOMESTIC
Super Religare SRL: Realize synergies economies of
Jul-10 Laboratories Ltd Piramals diagnostic Rs 600 Cr scale
services unit
(SRL) Piramal: Focus on core business
May-10 Piramal CIPLAs i-pill USD 21 Mn Piramal: Brand extension
NA: Not Available

Source: Business press
References:
1. Presentation by IVG partners, July 2010 - US Bound acquisitions by Indian
companies
2. DealTracker - August 2010 edition, Grant Thorton
3. Journal of Business Chemistry, 'M&A since Y2K - An overview of chemicals deals
involving BRIC countries in the new millennium', retrieved on September 20 2010
4. Business Economics, 'Mergers and acquisitions in the global chemical industry',
retrieved on September 19, 2010
5. Relevant business articles in Mint e-newspaper regarding M&A transactions
This article has been authored by:

Pratik Kadakia (pratik.kadakia@tsmg.com)
Sanjay Shyoran (sanjay.shyoran@tsmg.com)

Competing successfully in Indian
Specialty Chemicals Industry
India's strong position on the critical success factors for the specialty chemical
industry could help it emulate the success story of Europe in a similar structural
framework. However specialty chemical companies in India must address four key
dimensions in their strategy: innovation to meet local needs, channels for effective
customer interface, leadership in evolving sustainability trends and leveraging 2010
upstream chemicals supply; say Dr. Alexander Keller of Roland Berger Strategy
Consultants, Pratik Kadakia and Abhishek Nigam of Tata Strategic Management
Group
Global chemical industry, esp. specialty chemicals, moving

east
The chemical industry has in the past traditionally grown in the developed countries
of the West and Japan. However changing market dynamics over the last 10 years has
resulted in global chemical production moving increasingly to Asia (ex-Japan) from
the West, as indicated by the gain of 13% points share gain between 1997 and 2007.
(Refer Figure 1)
Figure 1: Regional share in global chemicals production
1997: EUR 1136 bn 2007: EUR 1820 bn
10.4%
11.0%
29.5%
32.2%
22.2%
28.0%
17.0% 7.5%
11.8% 30.4%
EU27 Asia Japan NAFTA Others
This trend is likely to continue in the future as growth in the chemical industry in Asia
unfolds. Specialty chemicals, a segment with higher than average overall chemical
industry growth rate and by definition closer to the customer industries like
automotive, construction and others, are a key contributor to this changing global
scenario. Some of these key consumer industries are becoming more and more
important in emerging countries in Asia. This trend is reflected in the significantly
higher growth of key consumer industries like automotive in emerging markets vis--
vis in developed countries of West and Japan. (Refer Figure 2)
Figure 2: Sales by region [m cars]
40 Emerging Markets
36
30
27 26
19 19 20 NAFTA
15 16 20
18 18 Europe
15
12
Japan/ Korea
6 6 6 6 6
2007 2009 2011 2013 2015

Beyond the growth of the customer industries requiring additional volumes of
specialty chemicals, the local chemicals production replacing imports also contributes
to the growth in these countries.
2010 India: A potential global specialty chemicals hub

The specialty chemicals market in India (including knowledge chemicals as active
ingredients in agrochemicals and pharmaceuticals) has the potential to grow at a rate
of ~15% p. a. to reach USD 40 billion by FY 2014. This growth potential is significantly
higher than the overall chemical industry projected growth rate for the world at ~3%
p.a. or even that for India at ~10% p.a.
Figure 3 : Consumption/Domestic Energy Production Balance 2008

Oil [m tons] Gas [bn cbm]
Europe 1) India (2008-09) Europe 1) India (2008-09)
85% 79% 60% 20%2)
626.4 91.4 161.6 33.5 425.3 168.6 40.8 32.8

535.0
128.1
256.7
8.0
Con- Dom. Imports Con- Dom. Imports Con- Dom. Imports Con- Dom. Imports
sumption production sumption production sumption production sumption production
1) EU 15
2) Comparably low gas consumption currently, increasing demand would result in significantly higher imports
Growth in the Indian specialty chemicals industry is driven largely by robust domestic
demand with exports based growth in select segments. Local demand for specialty
chemicals in India will continue to grow, driven by three main factors. Firstly, key
consumer industries e.g. textiles, automotive, construction, etc. are expected to grow
at rates higher than the overall GDP. Secondly, emerging customer needs across
consumer industries call for products with higher quality/ increased performance
products e.g. wrinkle free textiles, reflective glass, cement admixtures, etc. Finally,
manufacturing processes need upgrading leading to process and equipment upgrades
in many industries e.g. textile, paper, electronics, cosmetics, plastics
European specialty chemicals industry: A similar growth story

The growth potential of Indian specialty chemicals becomes all the more convincing,
when we take a look at the evolution of European chemicals industry. Faced with a
similar structural framework of limited carbon based feedstock availability, (Refer
Figure 3) European chemical industry developed the specialty chemicals segment
which has a much lower dependence on raw materials than base chemicals. Today
specialty chemicals production catering to both strong domestic market and exports
is worth ~EUR 150 billion (~10 times the size of Indian specialty chemical industry)
and accounts for around 40% of the total chemical sales in Europe. India could very
well emulate the strong position of specialty chemicals industry as witnessed in
Europe under similar structural framework conditions.

India's strengths aligned to achieve success in specialty
chemicals industry
If a quantum leap in production and marketing of specialty chemicals is to happen in
India, let us review the critical success factors (CSFs) in the business and how India 2010
fares on each of them?
Critical size of domestic market: The recent growth witnessed in the consumer
l
industries has created a large domestic market in excess of $20 billion. This now
provides the much needed critical size to the domestic industry for large scale
investments. Import substitution will lead to additional growth in the future.
Critical size in the demand industry supports critical size of local chemical markets
as well and makes local production interesting for national and international
players
Customized application development: India is a unique market with its own
l
distinct needs where customized application development is perhaps the single
largest critical success factor. Whether it is supplying innovative products to
support India's emergence as a small car hub e.g. plastic body panels to reduce
weight or providing products to support burgeoning demand for ultra-low cost
housing e.g. quick setting concrete; companies with the ability to meet the
distinct local needs exactly have a clear advantage.
Strong R&D capabilities: A large pool of qualified scientists and supportive
l
Intellectual Property (IP) protection framework help create strong R&D
capabilities as has been demonstrated recently with emergence of India based
global R&D centers of several chemical MNCs including Dow, DuPont, GE, etc.
Established process know-how: A strong technical manpower base of skilled
l
engineers and proven cost-efficient process know-how are readily available. For
example, frugal engineering or 'jugaad' that Indians have demonstrated amply in
cost effective processes and plants for Active Pharmaceutical Ingredients (APIs),
etc. is now a subject of study in the West.
Availability of reliable and competitive feedstock supply: Finally establishment
l
of chemical clusters including Petroleum, Chemicals and Petrochemicals
Investment Regions (PCPIR) with government support has created suitable
docking points for the Indian specialty chemicals industry. Already chemicals/
petrochemical majors like Total, Saudi Aramco, Shell, Exxon Mobil, Borealis and
Itochu Singapore have evinced great interest in participating in these PCPIRs. For
example, in case of Dahej PCPIR, INEOS is exploring options to manufacture and
supply catalysts not only to its anchor tenant OPaL (ONGC Petro additions Ltd.)
but also to its other clients in Eastern part of the world.
In summary, India's strong position on each of the CSFs for specialty chemicals
business forms the basis of the strong and sustained growth.

Emerging discontinuities: Opportunities to change global
industry landscape
As we discuss access to a sizable and growing market and strong position on CSFs,
2010 specialty chemical companies in India must take into consideration the emerging
technological/ market discontinuities that have the potential to become game
changers in the specialty chemicals landscape.
Developments in nanotech/ biotech in consumer industries are throwing up new
opportunities. For example, development of nano-tech based smart delivery systems
for pesticides/ fertilizers and architectural coatings containing nano-particles could
revolutionize the landscape of respective consumer industries. Breakthroughs in
catalysis using nano-tech could significantly alter automotive engines/ refineries.
Increasing concern over sustainable growth and consequently rising preference for
environment friendly products is generating possibilities for companies to create
green leadership and reducing environmental footprint. For example, consumer
preference for products such as bio-polymers and diesel with fuel additives which not
only increase fuel efficiency but also cut down the emission of greenhouse gases
could have far reaching implications for the industry.
Exploring these opportunities can become a unique opportunity for Indian chemical
companies not only to fight existing (international) competition by matching the
performance of their products but to create new products and businesses that can
become internationally competitive thus creating significant export opportunities.
Figure 4 :Competing Successfully

2
Develop channel
strategy to effectively
interface with
customers
COMPETING Address 3
SUCCESSFULLY IN sustainability
Innovate/adapt
trends
products/ services INDIAN SPECIALTY
1 to meet local needs CHEMICALS INDUSTRY
4
Leverage local upstream
chemicals supply
Competing successfully in Indian specialty chemicals industry

Given India's potential to emerge as a global specialty chemicals demand and
production destination, strong position on CSFs and opportunities presented by
unfolding discontinuities; what could companies do to compete successfully? Detailed
strategy formulation has do be done specifically by each company. We present here
some factors which every successful company must address in formulation of a
winning strategy. (Refer Figure 4)

1. Innovate and adapt products/ services to meet local needs
Emerging trends in consumer industries call for development of unique local
products/ solutions based on understanding of Indian customer. For example,
automotive industry requires chemicals/plastics to support emergence of India as a
low cost small car hub and green-tech features. Creating products to support growing
2010
demand for ultra low-cost housing projects and green buildings is critical for the
success of construction chemical companies. Likewise demand for environment
friendly crop-protection solutions/GM crops and processed food creates new
opportunities for agro-based chemical companies. Growth of renewable energy
sector is increasingly creating new customer segments for chemical players.
2. Develop channel strategy to effectively interface with customers
Another key factor which determines the success of any chemical company in the
near future is the effectiveness of its channels to interface with and service its
customers. Companies globally have employed innovative approaches like
establishing new web-based channels or leveraging distribution network of
complementary products to reach out effectively to their customers. An effective
channel strategy would not only benefit through increased understanding of
customer needs but also help capture increased value and establish control over a
business asset of increasing strategic significance. In particular in specialty chemicals
understanding needs of its B2B customers and providing respective services in a cost
efficient way is a crucial part of a successful strategy.

3. Address sustainability trends
'Green Transformation' is becoming a mantra of increasing significance for chemical
companies in a business environment with unprecedented levels of awareness for
2010 sustainable growth. An integrated approach across the value chain including
procurement, product design, manufacturing process and marketing along with
adequate reporting and risk management at each stage is becoming critical.
Companies could not only create value through green product/ process innovation
but also generate end consumer pull through ingredient branding in 'green products'.
Companies that establish recognized 'green leadership' among all stakeholders would
have a distinct first mover advantage over their competitors.
4. Leverage local upstream chemicals supply
A developing chemical industry producing raw materials and intermediates is
providing a solid backbone for the Indian specialty chemicals segment. Strong
governmental support for establishment of petrochemical clusters (PCPIRs) and
further development of specialized intermediate producers is creating a favorable
scenario. Chemical companies need to leverage these opportunities for creating
sustainable base for their growth.
In conclusion, the sizable growing domestic market and limited availability of carbon
based feedstock point towards development of knowledge-based specialty chemicals
as the most logical way forward for India's chemical industry. Specialty companies in
India could revisit their respective growth strategies to factor in all the four
dimensions mentioned above to effectively participate in and drive this growth story.

Chemical Industry needs more
'Explorers'
'Tell people that you work in the automotive, electronics or computing industry and
they will pretty much understand. Tell someone, "I work for a company in the chemical
industry that produces nitro-cellulose, surfactants and starch-based polymers", and
watch the clueless look'
- R Gopalakrishnan*
2010
Institutions make choices at forks on their journey and embark on distinctive
trajectories. The choice made is influenced by its culture and mindset. During the
recent crisis, for example, Germany spent a gentle 1.5 percent of GDP on stimulus but
set about balancing budgets and restoring confidence. America borrowed big to
spend a dramatic 6 per cent of GDP. Germany is recovering nicely with a 9 percent
annualized growth in first half 2010. America is emerging, but slowly.
The chemical industry is at a fork in its journey. The industry has been obsessed with
innovation for many years. The results have been fabulous. For example, thanks to
the path-breaking fertilizer process by Fritz Haber and Carl Bosch in 1909, there is
enough food for today's 6 billion. This technology arguably made the greatest
difference to mankind in the twentieth century.
However in the future, there has to be a balance between innovation, consumer-
intimacy and sustainability.
Chart1: Industry wise segregation of the top 100 global brands:

Interbrand Survey 2009
The image of chemicals

This industry provides products for everyday life: fertilizers, medicines, paints,
cleaning products. It also produces value-adding, industrial products for customers:
polymers, catalysts, coatings, petrochemicals. However, its consumer connectedness

and environmental image are less impressive.
Two surveys illustrate the chemical industry's lack of consumer connectedness and
poor communications. In an image survey by TSMG, the auto industry conjured
2010 mobility and evoked feelings of speed, telecom connected with social warmth and
communication, and IT associated with computation. The chemical industry evoked
an unclear image with a negative hint. To the query on improving the quality of life,
respondents admitted ignorance.
Tell people that you work in the automotive, electronics or computing industry and
they will pretty much understand. Tell someone, "I work for a company in the
chemical industry that produces nitro-cellulose, surfactants and starch-based
polymers", and watch the clueless look.
A 2009 brand survey by Inter-Brand also reinforced the lack of consumer
connectedness of the chemical industry. Almost every sector except chemicals finds a
mention in the list of 100 leading global brands. (See chart 1)
Explorers and farmers

Recently I had a philosophical conversation with the President and CEO of Kureha
Corporation, Takao Iwasaki, a visionary technocrat. He was sure that the recent crisis
and global concerns would trigger an 'environmental technology revolution' that
would transform the industrial framework of the world. By 'framework', he referred
to a new game with new rules and new players.
But what might the new framework be? In my view, as shown in chart 2, it means a
triangulation of environmental sustainability, consumer-connectedness and
innovation. Successful companies in all sectors are gravitating to this triangulated
space.
Iwasaki-san said that there were two types of manufacturing companies or activities:
hunters and farmers. A company may be one or the other; it may also combine the
two types. I prefer the term 'explorer' rather than hunter.
Explorer companies produce consumer-facing products as Toyota, Sony and Kao do;
consumers are their 'finds'. Being consumer-oriented, explorers are sensitive to the
behavioural patterns and expectations of consumers. They use creativity and
ingenuity (read innovation) to capture as many finds as possible. Explorers are highly
consumer-connected, B2C type companies.
Farmer companies are focused on what their land can produce. They sell to
markets/customers rather than to end consumers. They monitor market prices and
will grow/develop any new thing based on customer demands so long as their land
(=technology) can do it. Through product advantage, they improve their customer's
offering to consumers. Farmer companies are customer-connected, or B2B
companies.

Chart 2: The new framework for the Chemical industry
Consumer Connectedness
2010
Chemical
Industry
Innovation Sustainability
Chemical industry
The chemical industry is huge with global sales in 2010 of about $ 3.5 trillion. It
retains the appellation of chemistry unlike its peer sciences, which have not spawned
physical, mathematical or biological industries! The peer sciences evolved and are
today recognized through their applications; for example, physics evolved into
engineering, optics, and electronics. Biology manifested as medicine and animal
health. Chemicals suffer from inadequate recognition, though the applications of
chemistry are vibrant and diverse. Unlike other industry segments, the chemical
industry sells as much as 80% of its output to B2B customers. For the large part,
chemical companies are faceless and incomprehensible.
The chemical industry has too many farmers and too few explorers. Add to this fact
the occasional environmental damage, and chemicals become the number 1 villain of
the future.
That is why the chemical industry is exploring a new positioning within the triangle of
consumer connectedness, environment and innovation. Through bio and
nanotechnology, the chemical industry will become benign in a transformational
journey.
Sustainability
Promoting sustainable approaches makes business sense. Sustainability calls for
thought about the long-term implications of activities, and to measure the future
performance of investment against environmental and social criteria apart from
financial criteria. Sustainability means meeting needs of the present generation,
without compromising ability of future generations to meet their needs.
ICIS conducted a study in 2009 which spanned over 900 respondents from the
petrochemicals, specialty chemicals and polymer segments of the chemical industry,
including CEOs. The good news was that the industry was aware about sustainability
issues. The worrying news, however, was that most companies did not know what to
do or had postponed actions due to more pressing matters.
In the ICIS survey, 60 percent of chemicals customers actually expressed interest in
sustainably produced chemicals. However cost was perceived as the biggest
prohibitive component of a sustainable program, followed by technical capabilities.

Most CEOs in the developed countries worried that making their operations
sustainable and developing green products might place them at a disadvantage vis--
vis rivals in developing countries that don't face the same pressure. Hence most
executives treat the need to become sustainable as a corporate social responsibility,
2010 and not directly related to their business objectives.
A study by C. K. Prahalad, Ram Nidumolu and M. R. Rangaswami suggests that
sustainability has successfully acted as a spur to profitable innovations. Becoming
environment-friendly lowers costs because companies end up reducing the inputs
they use. In addition, the process generates additional revenues from better products
or enables companies to create new businesses. Smart companies increasingly treat
sustainability as innovation's new frontier.
Lenzing of Austria
Lenzing was set up in 1938, committed to natural fibres (like rayon) from wood pulp.
They were pitted against giants like Courtalds and DuPont who made competing
synthetic fibres, based on polymer chemistry. Lenzing focused on the consumer and
environment by developing solvent-spinning to reduce the environmental damage
that rayon-like products caused. In 2004, Lenzing bought Tencel, originally developed
by giant Courtalds. It is now a focused, environment-friendly cellulosic fibre company,
offering absorbency that the synthetics do not offer-a delightful success story of
sitting in the middle in the triangle.
A four point future agenda for the chemical companies could well be:
1. Communicate comprehensibly and reinforce consumer benefit even for B2B
applications rather than industrial use. This will result in better recall and a
positive relationship with the end consumer. If sufficient brand equity is
established, this could even lead to ingredient branding.
2. Focus on sustainability strategies. Emphasize water, energy conservation, reduced
carbon footprints and 'go green'. Even if some technologies are not viable
currently, it is only a matter of time before there will be industry standards.
Regulations should not be the sole reason to drive sustainability initiatives.
3. Companies should track percentage of sales coming from new products or
processes. Research teams should also be tracked on this measure to ensure that
R&D spending is effective. Devote a part of R&D to efforts involving sustainability
4. Leverage next generation technologies like biotech and nanotech.
(* The author is Vice Chairman of Tata Chemicals and acknowledges the assistance of Pratik Kadakia and Jeffry Jacob
of Tata Strategic Management Group. The views are personal.)

Hazardousness of Chemical Industry
Negative perception of Chemical Industry
Until the early '80s the chemical industry used to enjoy a positive reputation. The
industry was recognized for its ability to improve the quality of life of people, Over
the past few decades, however several accidents have contributed towards an 2010
unfavorable image. Extensive media coverage and negative publicity have cemented
this negative image that the chemical industry has acquired starting in the 80s.
In a recent study by Covalence, ethical research institute, the chemical industry
ranked lower than most other manufacturing industries, including automobiles,
personal care and industrial goods. This study was based on a perception of working
conditions, impact of goods, production and institutions. Similarly, in a public image
study by Cefic, the chemical industry ranked 6th out of the 8 industries surveyed.
Water and air pollution, environmental damage, health risks and factory accidents
were perceived to be the most significant risks in turn impacting perception.
These surveys raised some interesting questions:
Is the chemical industry more risk prone than other industries? Is this perception
l
matched by reality
Are there some sectors within the chemical industry that are more risk prone or
l
hazardous than others?
Tata Strategic Management Group undertook a research to determine the answer to
the above two questions.
The first step was to clearly define 'risk' and then develop a structured framework to
assess risk across various industries. Further, various sectors within the chemical
industry would also be evaluated on the same framework to understand the relative
ranking of the various sectors on the 'risk' parameters.
Fig. 1: Chemical Industry Perception - Trend
60
Pasadena
Unfavourable
USA Favourable
50
Proportion of respondents
40
Victoria Touluse
Australlia France
30
Bhopal
Seveso India
20 Italy
Basel Enchede
10 Switzerland Netherlands
0
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Fig. 2: Risk Assessment-By Industry
High
Chemical
2010 Basic metals
Health & Environment Risk

Paper products
Food products
Fabricated
Industrial metals
Electric
machinery
equipment
Wood products
Transport
equipment
Textiles
Low Occupational Risk High
Risk Assessment Framework

The ICC defines hazard in chemical industry as 'an inherent physical or chemical
characteristic that has a potential to cause harm to people, environment or property'.
Safety and control mechanisms lower the intrinsic hazardousness. The risk of a hazard
can be assessed using exposure in conjunction with the potential hazard.
Risk can be of the following two types
1. Health & Environment risk
2. Occupational risk
Health & environment risk depends on the toxic chemical discharge and air pollutants
discharge by industries. Occupational risk depends on injury incidence rate (fatal/
non-fatal) and illness incidence rate.
On comparing various industries using this framework (Fig. 2), the chemical industry
ranked higher on health & environment risk but lower on occupational risk. The
parameters of 'health and environment risk' and 'occupational risk' were further
studied to understand the areas on which the chemical industry ranked higher.
Chemical Industry vs. other Industries

The chemical industry ranks the highest in terms of total discharges and second (after
primary metals) in terms of air pollutants released. However this is due to the large
number of chemical industries and its contribution to total industrial production in
the world. On a per facility basis, waste discharges and air pollutants are lower than
primary metals, petroleum and paper industries.
In the last few decades despite increasing production, toxic releases per facility in the
US have reduced by 60% and GHG emissions have also reduced by 30%. This is due to
several safeguards being implemented by the industry in the recent past.
Injury incidence rates are fairly low in the chemical industry. In other manufacturing

industries, transportation accidents and contacts with objects comprised 70% of all
accidents, whereas in the chemical industry fire & explosions and transportation
accidents accounted for over 60% of all accidents.
The Illness incident rate is amongst the lowest in the chemical industry. In all other
manufacturing industries, ~30% of all occupational illnesses pertained to hearing
2010
disease, while in the chemical industry skin diseases was the highest, with ~26% of
total occupational diseases.
Sub-segments within Chemical Industry

Intrinsic hazardousness of petrochemical sub-segment is the highest due to the large
volume of flammable and toxic chemicals handled. However due to safety and control
mechanisms, it ranks amongst the lowest in terms of health & environment as well as
occupational risk.
Fig. 3: Toxic Chemical Discharge - By Industry (Indexed)

1
Release: Toxicity x Volume
Discharges per facility Industry Total discharges
218 99
Primary Metals
188 32
Petroleum
124 16
Paper
100
Chemicals
23 9
Transportation Equipment
14 11
Fabricated Metals
12 Industrial Machinery 3
10 Electrical Equipment 2
7 Wood Products 2
4 Food Products 2
2 0
Textiles
Fig. 4: Air Pollutant Emissions-By Industry (Indexed)

Air Pollutants 1
Emissions per facility Industry Total Emissions
235 Primary Metals 121
228 Paper Products 90
108 Petroleum 66
100 Chemicals 100
38 Wood Products 23
37 Food Products 31
23 Textile Mills 3
17 Transport Equipment 9
7 Electric Equipment 3
6 Industrial Machinery 2
5 Fabricated Metals 6

Fig. 5: Occupational Risk-By Industry (Indexed)
Injury Incidence Rate

Non Fatal: India Industry Fatal: India Fatal: US
2010 1672 2.64 Basic Metals 0.2 222 0.04
287 4.53 Paper Products 0.15 167 0.03
111 1.75 Non Metallic Mineral Prod 0.12 133 0.07
56 0.89 Wood and Wood Products 0.11 122 0.07
111 1.76 Fabricated Metals 0.09 100 0.05
100 1.58 Chemicals 0.09 100 0.03
77 1.22 Motor Vehicles, Trailers 0.08 89 0.02
146 2.31 Industrial Machinery 0.07 78 0.02
Within the chemical industry, fertilizers and paints are amongst the highest on
occupational risks while dyes and organic chemicals are the highest in terms of health
& environment risks. At an overall level as well as on a per facility basis, dyes have the
highest toxic chemical discharges. In terms of air pollutants released, organics
segment is the highest while on a per facility basis dyes still continued to lead the
rest.
Fig. 6: Risk Assessment-Chemical Industry Sub-Sectors

100
Organic
Chemicals
Health and Dyes

Environment Risk
Toxic chemical discharge
Air pollutant emissions
Inorganic
Chemicals
Fertilizers
Petrochemical Pesticides Paints
Pharma
Occupational Risk 100

Non fatal injury incidence rate
Illness incidence rate
Inferences
Overall the chemical industry is perceived as more hazardous than other industries.
But this perception is not matched by reality. The chemical industry is amongst the

lowest on occupational risk parameters, comparable with paper and textile industry.
On the health & environment risk, the chemical industry is high, next to primary
metals. This infers that perception is based more on health and environment risks.
However on a per facility basis, it is still lower than other industries such as primary
metals, petroleum and paper. This clearly identifies the need for communication so 2010
that perception can be more accurate and aligned to reality.
Way forward
Changing public perception is a very difficult task and needs concerted and collective
action by the industry. While any major crisis could lead to a drop in reputation, the
recovery is dictated by the nature of activity undertaken by the industry.
The chemical industry needs to make serious efforts to develop more sustainable
products and processes, as well as reduce environmental discharges. Various safety
mechanisms and industry initiatives, including Responsible Care, have resulted in a
decrease in health & environment and occupational risk over the past few decades.
The industry should continuously engage with its customers and communicate the
value that chemicals add to their daily life. Sustainability and innovation will be the
two mantras that could go a long way in changing public perception and creating a
positive image of the chemical industry.
This article has been authored by:

Pratik Kadakia (Pratik.kadakia@tsmg.com) and Jeffry Jacob (jeffry.jacob@tsmg.com)
Note: This article is based on the results of a study done for Tata Chemicals/ Rallis and has been reproduced here with
their permission

Acting green - Philosophy to
results: An Indian perspective
Going green will no longer be a matter of choice but will become a strategic
imperative for Indian chemical companies. Companies in India employing innovative
approaches to capture economic, social and environmental benefits of green
chemistry can establish a competitive advantage say Pratik Kadakia, Abhishek Nigam
& Ashwin Rao of Tata Strategic Management Group.
2010
Global evolution of green chemistry
Green chemistry is not a novel concept; though it started gaining popularity in the 90s
when Paul Anastas and John Warner popularized it through their 12 tenets.1 Green
chemistry is today acknowledged as a science based, economically driven approach to
2
environmental protection and sustainable development.
In their efforts to ensure sustainability, companies are increasingly looking at reducing

waste generation and energy usage while attempting to manufacture chemical
3
products in a more sustainable manner from renewable feed-stock. For example
DuPont, a global chemical company set well defined, measurable goals for reduction
of their environmental foot-print as early as 1989. They took the second leap in 2006
when they also committed to initiatives with market facing goals, targeting USD 8 Bn
annual revenues for products manufactured from non-depletable resources by 2015.4
GE, as part of their 'ecomagination' campaign is implementing GHG and energy

reduction projects at their global sites and realizing cost savings through the same.
They are also developing profitable products and services to help their customers
meet environmental goals. In 2008, they generated revenues of USD 17 Bn from their
'ecomagination' portfolio.
Economic

Improved top lines

Reduced manufacturing costs
Input Process

Reduced raw material
Increased energy &
costs material efficiency

Reduced dependence on Triple Bottom
Reduced waste
non-renewable feedstock Line management costs
Environmental Social
Savings on
Healthy satisfied work-force

Regulatory & compliance costs
Community well-being

Damage due to negative press Output

Litigations in case of chemical disaster
Improved product quantity
& quality

Product differentiation
green marketing

AstraZeneca realized that waste management costs comprised almost 40% of total
production costs. By driving a waste minimization programme and further reducing
the hazardous waste produced at their Huddersfield site, they were able to save ~
5
USD 5 Mn over four years.
2010
Similarly, Dow Chemical recognized sustainable chemistry as an important component
of their corporate strategy, defining it as a "cradle-to-cradle" concept that drives
efficient use of resources, minimizes environmental footprint and delivers solutions
for customer needs. Further to manufacturing from renewable resources, the Indian
arm of Dow Chemical has signed an MOU with a local company, Royal Castor
Products, for research in sustainable, bio-based products & solutions using castor oil.6
An increasing number of global collaborations and growing consciousness on

environmental and health fronts are driving innovations in green chemistry in India.
Green chemistry: India story

Reducing the environmental footprint is gaining momentum in the Indian chemical
industry, amongst both end users and suppliers. The textile industry has adopted
microbial decolourization and degradation, exploring biodiversity for natural dyes and
7
developing eco-friendly methodology for synthetic dyes.
Hindustan Petroleum Corporation Limited (HPCL), a leading refinery, has stated its
intent to bring to market, green lubricants developed from renewable feedstock.8
DuPont, as part of its R&D strategy, has set up a knowledge centre in India focusing
on areas like green technologies for refinery processes.9
GNFC, a public sector company, has developed and implemented Environment

Management System (EMS) for its fertilizers, chemicals and supporting services at
Gujarat. Due to EMS, they have achieved reduction in energy, water and lube oil
consumption and increase in revenue from scrap sale due to better segregation.
Tata Chemicals, a leading Indian inorganic chemicals and fertilizer company, has
established an Innovation Centre to focus on green technologies in emerging areas
such as nano-technology, fermentation and bio-fuels. The centre plays a dual role,
greening existing businesses by researching bio-chemical processes that are more
environment-friendly and energy efficient, as well as developing new green products.
These are just some examples of various initiatives in green chemistry being pursued
by the Indian industry.
Enabling infrastructure
The initial success of green chemistry in India is also attributed to the active role
played by other stakeholders, including government and research organizations. The
green chemistry programme started by the Department of Science and Technology in
2004 supports industry led research and training in the form of workshops. Currently

the department supports research in several fields including ionic liquids, non-
hazardous bromination and degradable polymer composites, packaging plastics and
10
bio-surfactants.
While large companies may have the wherewithal to undertake research on their 2010
own, small & medium enterprises (SME) would need more support. Organizations
such as the Gujarat Cleaner Production Centre (GCPC) recognize this need, and in
association with United Nations Industrial Development Organization (UNIDO)
identify and provide consulting services for SME projects in the green chemistry
space.
Several companies have tied up with academic institutions such as Mumbai University
Institute of Chemical Technology and research organizations such as National
Chemical Laboratory, Pune. As a result, active research is being conducted in areas,
such as oxidation of alcohols to carbonyl compounds, green synthesis of amides from
nitriles and making ionic liquids more effective for promoting organic reactions, to
address industry specific concerns.
'Enviropreneurs' or entrepreneurs with business models built on addressing

environmental concerns profitably are providing a wide range of solutions in the
areas of yield improvement and solvent recycling to minimize waste. Also, special
environment funds are looking to invest in green technologies, especially in enzymatic
11
production routes and bio-polymers.
Emerging business models which capitalize on the likely disruptions in the Indian
chemical industry will successfully drive the growth of green chemistry. Companies
that understand the market, regulatory and technology trends, which have the
potential to alter the landscape of the Indian chemical industry, will be in a better
position to take advantage of the same and establish a strong foothold.
Game changers
The growth of the global bio-renewable chemicals market, which was reported to be
USD 1.63 Bn in 2007-08 and is further expected to increase to USD 5 Bn by 2015,
could offer significant opportunities in India.12 This is largely fuelled by increasing
consumer demand for environment friendly products and awareness of chemical
ingredients used. In addition to this increasing market awareness, several Indian
chemical companies are also actively participating in voluntary initiatives such as
'Responsible Care'. Companies which are at the forefront of the green movement will
be able to capture greater mindshare of the customer which will translate to larger
market share in the future.
REACH has been a game changing regulation in the past and has impacted the way
chemical companies do business. Companies need to be prepared for more stringent
regulations in the future, which could mean investments in technology. Companies
which pro-actively take steps to ensure sustainability and go green will be able to

ensure unrestricted access to markets, boost their reputation and gain competitive
advantage in the marketplace.
Recent developments related to bio-synthesis of some widely used industrial solvents

2010 increase the possibility of companies replacing oil-based derivatives in their processes
and products. Carbohydrates, fatty acids and fatty alcohols from oil crops are also
13
being used to generate bio-surfactants with the help of microbial enzymes. India,
with its vast bio-resource potential, offers a good opportunity for production of green
specialty chemicals from agri-based raw materials. While the concern over use of land
for food versus non-foods is not yet resolved, these technological advancements
nevertheless have the potential to create a significant impact in India as well as alter
the sourcing landscape. Companies which invest in R&D in India will have a
competitive advantage, both in terms of availability of qualified resources and raw
materials as well as access to a large pool of consumers. Besides being in a position to
bring green products to the market quickly and enjoying a first mover advantage,
companies could also leverage the gains in other markets.
Competitive advantage for leaders

Leading the green charge successfully will require companies to devise innovative
approaches to deliver economic, environmental and social benefits. CEOs need to
place their bets today on whether they will lead the way in adopting green chemistry
and create a competitive advantage or be content being a participant in an already
crowded space in the future.
A case in point is Dow Corning, which started 'Materials Conversion' to recover value
from waste, scrap and off-specification silicone materials i.e. materials that cannot be
reused in their original form, by converting them to usable products. In this way, they
both protected the environment by keeping materials out of landfills and incinerators
and met customer needs in new and existing applications.14
Benefits of adopting green chemistry

Chemical companies in India have the opportunity to lead the way in adoption of
green chemistry today over passively following the green trend as it gains
momentum. Companies which choose to take leadership will be in a strong position
to leverage the external discontinuities emerging from the regulatory, technological
and market fronts.
Companies need to have a comprehensive and well thought out plan for achieving
sustainability and green objectives. A three point agenda for Indian companies to
accelerate their journey to go green could be:
1) Build sustainability goals into vision statements, with clear objectives cascading
down to market facing goals. These could take the form of clearly defined
revenue targets for green products - manufactured from renewable feedstock or

fully recyclable products and operational goals such as reduction in carbon
footprint
2) Communicate and demonstrate top management support to green initiatives.

This is necessary for innovation to flourish, which is a key enabler in the path to 2010
go green. It will also help the management resist short-term pressures from
derailing long-term strategic intent
3) Undertake a life-cycle assessment of existing products and look for opportunities

to introduce green products/ services, based on an understanding of current and
evolving customer needs. This could throw up areas within the supply chain that
are environmentally deficient and most probably economically inefficient
Companies could initially face cost and scalability issues for green technologies and
products. However, a clear roadmap with prioritized actionables will help companies
achieve their triple bottom line and realize the benefits of green chemistry long
before competition steps in.
References
1. Paul Anastas and John Warner, "Green Chemistry: Theory and Practice"
2. Upasana Bora, Mihi Chaudhuri and Sanjay Dehury, "Green chemistry in Indian
context - Challenges, mandates and chances of success"
3. ICIS Chemical Business article, "Are chemical producers engaged in the drive to
use green chemicals?"
4. "DuPont 2008 Sustainability Progress Report"
5. The Royal Society of Chemistry, Green Chemistry Journal, "Lean, mean and green
chemistry - can we have it all?"
6. MoU signed during Vibrant Gujarant Global Investor Summit 2009, "Dow India
and Royal Castor Products Ltd. join hands for research and innovation in Gujarat"
7. M Kidwai, "Green chemistry in India"
8. Article in Economic Times, Mumbai edition

9. Business Standard Nov 24, 2008, "DuPont knowledge centre to focus on green
tech"
10. DST Presentation at SCI conference, Apr 15 2009, "Green Chemistry programme
2010 of DST"
11. SACEF presentation at SCI conference, Apr 15 2009, "Constraints of investing in

the green chemical industry"
12. Frost & Sullivan report citing demand for green chemicals
13. MISTRA, "Greenchem - Specialty chemicals from renewable resources"
14. "Dow Corning Sustainability 2004 & 2006 Summary Report" and 'Materials
Conversion' webpage
15. Respective company and association websites and annual reports
Pratik Kadakia is the Head of Chemical & Energy Practice at Tata Strategic Management Group, a leading Indian
management consulting firm. The author can be contacted at pratik.kadakia@tsmg.com

Will India be the next big green
growth market?
By 2020 India aims to generate 15% of its electricity from renewable sources,
excluding large hydroelectric power plants, a goal that could pave the way for
overseas investment.
India In 2009 India's installed renewable energy capacity, excluding large 2010
hydroelectric power plants, was about 16 GW. In terms of installed wind capacity it
ranked fifth in the world with more than 11 GW.
But despite this impressive set of figures, total power produced by this capacity
currently accounts for less than 2% of the total power produced in India. Assuming
continued strong growth in electricity consumption, India would need an installed
renewable energy capacity of some 100-110 GW to reach its 2020 target, meaning a
capacity ramp up of about 8 GW/year.
As challenging as this may seem, other countries have already successfully

demonstrated how to quickly increase renewable energy growth rates in a relatively
short period of time. For example, since Germany's renewable energy law was passed
in 2000 its installed renewable energy capacity has grown at a compound annual rate
of 16% from 11.9 GW in 2000 to 39.9 GW in 2008. Over the same period, the total
power produced in Germany from renewable sources soared by over 150%. Before
the law was enacted, the country had only managed to achieve single digit growth
rates for renewable installations between 1990 and 2000.
Meanwhile, China has for the past five years doubled its installed wind capacity year-
on-year, adding 13 GW in 2009. Latest official Chinese statistics show that the nation's
renewable energy capacity is now increasing at a faster pace than that of its coal
plants.
Investors might look back and remember how India has in the past failed to achieve
declared ambitious growth targets in its power sector. For instance it fell about 40%
short of its 2007-2008 capacity addition programme target, while the implementation
of several of its infrastructure projects have been beset with troublesome issues such
as land acquisition.
However, there are five good reasons to believe that India will achieve ambitious
renewable energy growth rates soon.
Vast Renewable Resources

India is very rich in wind resources and official estimates predict the country's
installed capacity at about 50 GW by 2020 but some industry experts believe this
figure too conservative and suggest levels could be as high as 150-200 GW by the
same year.
India also has huge solar potential. The daily average incident solar energy over the
country varies from 4-7 kWh/m and the country benefits from 2300-3200 sunshine
hours per year, depending upon the location. In addiiton, as the cost of building solar

technologies continues to fall over the next 5-10 years, a significant scale-up of solar
generation, in multiples of tens of GW, is a very realistic possibility for the country.
There is also vast untapped potential from different biomass sources. Agro-residue
2010 has a potential of generating approximately 18 GW of energy in India, while bagasse
has the potential of generating about 4 GW. And, about 60 GW of power can be
generated from energy crops in the country's degraded wastelands, while the
country's renewable energy minister has identified 15 GW of potential generating
capacity from small hydroelectric power plants.
Energy Security Remains Key Concern

Driven by consistent economic growth, India's power requirements are expected to
grow at a rate of 6.4% per year and are anticipated to reach 1600-1800 TWh by 2020.
This would imply that the country's total installed capacity will soar from about 160
GW in 2010 to about 450 GW by 2020. Coal is expected to remain the country's
principal energy source in the coming years and despite India holding almost 10% of
the total global reserves of coal, imports rose from nothing five years ago to more
than 50 million tonnes in the last fiscal year. It also imports somewhere in the region
of 75%-80% of its crude oil requirements and, until recently, a significant amount of
LNG. Given its market exposure, the vulnerability of the country to international oil
price volatility is another threat to India's energy security which renewable energy
resources could help guard against.
Rural Electrification Rates are set to Increase

India has come a long way in the past two decades in terms of rural household
electrification with about 52% electrified as of 2010, against 43.5% in 2001 and 30.5%
in 1991. Distributed generation from green energy sources can help in fulfilling the
government's stated 'power for all' policy objective, under the terms of which it is
envisaged that still further efforts to develop rural electrification systems at an
accelerated pace will take place.
Development as Renewable Energy Manufacturing Hub

India's wind turbine industry clearly shows that the country has developed into a
global hub for manufacturing renewable energy equipment. Its current wind turbine
generation manufacturing capacity is some 4 GW with the potential to increase
capacity to 15 GW annually. As a result, this growing industry could potentially
employ 400,000 people in India and generate revenues of up to US$12 billion/year for
the country. Players such as Suzlon have already emerged as global leaders and the
company, which also includes a majority holding in German manufacturer REpower, is
the third largest supplier globally and in 2009 held 10% of the market.

Threats from Climate Change
India is the fourth largest carbon emitter in the world and if its reliance on
conventional energy continues, emissions will increase further. The country's carbon
dioxide emissions are expected to triple by 2030 if the current dominance of 2010
conventional resources in the energy mix continues. The country's National Action
Plan on Climate Change has categorically called for keeping the per capita
greenhouse gas emissions below that of developed countries at any given point in
time. By 2020, India aims to reduce its emission intensity to 25% of the 2005 levels.
Power from green energy plays an important role in the portfolio of options pursued
under the National Action Plan on Climate Change.
However, players in Indian green electricity generation still face a number of critical
challenges today, some of which traverse all renewable technologies. These include
inconsistent and unreliable incentive schemes; limited grid
infrastructure/connectivity; difficulty in passing on the additional cost of renewable
power to final consumers; outdated or unavailable resource maps; as well as the
currently limited size and scale of domestic component production.
Meanwhile, some issues are more technology-specific. Wind faces hurdles in grid
infrastructure and power evacuation, a shortage of human talent and R&D capability,
as well as difficulties in recovering payments from distribution utilities.
Solar's problems, meanwhile, come from the high initial capital expenditure required
and the fact that a significant number of the most suitable sites are in remote regions
which can add complexity to the output transportation issue which may require
additional transmisison infrastructure. Elsewhere biomass has feedstock availability
issues and low feed-in tariffs, while small hyrdoelectric power plants face complex
bureaucratic hurdles.

These challenges mean that decisive steps need to be taken in order to overcome the
growth barriers first and foremost by adapting the legislative framework and the
introduction of a set of renewable energy laws with clear guidelines. In addition, the
industry would benefit from focusing on creating a market for renewable energy by
2010 introducing renewable purchase obligations and securing preferential grid access for
renewable energy output.
The industry could also draw support from the strengthening of country's grid
infrastructure through the introduction of a strict grid code and clear roles and
responsibilities for the evacuation infrastructure along with ownership and
maintenance.
Evolving the grid infrastructure into smart grids would facilitate net-metering, which
in turn could significantly increase distributed power generation from renewable
sources, especially wind and solar. And by introducing land reform, sites that are rich
in renewable energy resources could be reserved for power generation.
The issues raised could be overcome with government support and industry
leadership in the near future and therefore investors should be positioning
themselves already today to benefit from this growing market.
Klaus Peter Mller is Partner in the Global Energy & Chemicals Competence Center with Roland Berger Strategy
Consultants. Pratik Kadakia is Practice Head Energy & Chemicals with Tata Strategic Management Group.

Emerging opportunities in Indian
Pharmaceuticals industry
Higher R&D costs, relatively dry pipeline for new drugs, increasing pressure from
Governments for reduced healthcare costs and a host of other factors are putting a lot
of pressure on global pharmaceutical companies. The industry is bracing itself for
some fundamental changes in the market place and is looking at newer ways to drive
growth. These global trends will have serious implications for domestic pharma 2010
companies. However with the right strategy, Indian companies are very well poised to
take advantage of these changes and successfully navigate the future, say Pratik
Kadakia-Practice Head, Chemical & Energy; Jeffry Jacob-Engagement Manager and
Ankur Singhai-Project Leader, Tata Strategic Management Group
Even before the current economic downturn set in, global pharma companies were
under pressure. Global pharma majors are facing the dual impact of drying New
Chemical Entities (NCE) pipeline and patent expiry of top selling drugs over the next
few years. In 2007, the FDA approved just 19 new drugs, the lowest in over two
decades. Declining productivity, relatively dry pipeline for new drugs, higher cost of
approval for new drugs, and a host of other factors have been leading to lower
profitability.
The developed markets comprising of US, Europe and Japan, which have traditionally
been the stronghold of patented drugs, are expected to witness lower growth going
forward. Impending policy changes promoting use of generics is expected to further
dent the top-line and bottom-line of global pharma majors.
The global companies have responded to the dwindling sales and dry product
pipelines by acquiring their peers and in the process creating global pharma goliaths.
In order to sustain growth, most companies are looking at M&A as the way forward.
Innovator companies are increasingly buying out generic companies (eg. Daiichi
Sankyo's acquisition of Ranbaxy) or entering into strategic alliances (eg. GSK-Aspen)
to participate in the fast growing generics market. As per Richard T Clark, Chairman
and CEO, Merck, the $ 41 billion acquisition of Schering Plough will provide Merck
'benefit from a formidable research and development pipeline, a significantly broader
CONTRIBUTION TO GLOBAL PHARMA GROWTH

Contribution to Global Growth Share of Sales, 2009F
(% of Total) (% of Total)
10%
11% 13% 18% 17%
17% 8%
23%
9% 32% 34% 39%
13% 14%
7% 13%
15% 14%
16% 3%
9%
51% 17%
14%
27%
15% 12% 10%
-1%
2006 2007 2008 2009F
20%
US & Canada EU5 Japan
Rest of Europe Pharmerging Rest of World

Source: IMS Health Note: Pharmerging countries refer to Brazil, Russia, India, China, Turkey, Korea and Mexico

GLOBAL PHARMACEUTICAL COMPANIES: STRATEGIC IMPERATIVES
Focus on emerging markets
2010 Mergers, acquisitions &

alliances to achieve desired
Focus on generics
scale and market reach
STRATEGIC
IMPERATIVES
Outsourcing - Contract Reducing complexities in

research & manufacturing supply chain
Rationalization of
manufacturing setup
Source: Tata Strategic Analysis
portfolio of medicines and an expanded presence in key international markets,

particularly in high growth emerging markets'.
Leading pharma companies are also looking at newer areas like biologics and
increasing their presence in emerging economies to fuel future growth (eg. sanofi
aventis's acquisition of Medley S/A Industria Farmaceutica, a Brazilian generics
company, in April 2009). Cost competitiveness has become more important than ever
and companies are looking at outsourcing all non-critical elements of the value chain.
Implications for Indian pharma

Global companies are actively entering new markets, including generics in emerging
economies, which innovator companies had earlier stayed away from. Differentiated
pricing strategy across different markets will lower the cost differential vis--vis local
generics manufacturers. Global companies are increasingly looking at buying out
domestic companies who will now also face the risk of hostile takeovers. Some of the
far reaching implications for Indian pharma companies across the entire value chain
are-
Competition in the domestic market
l
With growth expected to taper off in the US and other developed countries, emerging
economies like India are expected to drive future growth. The key growth drivers in
these countries are increasing per capita income, growing insurance penetration,
better health awareness, higher government expenditure, adherence to IPR norms
and shifts in disease profiles.
The Indian pharma market consisting of domestic formulation consumption,
formulation exports and bulk drug exports was estimated at $ 17 billion in FY2008.
The domestic formulation business which comprised of $ 8 billion in FY2008 is
estimated to grow at over 12 percent annually to reach $ 14 billion by FY2013.
Overall growth in domestic formulations is expected to be driven by lifestyle related
or chronic therapeutic segments, such as cardiovascular, anti-diabetic, respiratory and
gastro-intestinal, which are expected to grow at a much faster pace than the more
traditional acute segments. Increasing stress levels and changing/ unhealthy eating
habits of a burgeoning population are expected to result in significantly higher
incidences of lifestyle ailments. This has led to MNCs such as Pfizer, GSK, Roche and

India: Domestic Formulation by Therapeutic Category (FY 2008)
(Rs. Bn.) Expected Growth
FY 2008 to FY 2013
Anti Diabetic 16.0 18.8%
Anti-infectives 57.3 14.0%

2010
Cardiovascular 34.8 15.9%
Dermatology 17.5 12.4%
Gastro Intestinal 35.0 14.0%
Gynaecology 18.1 14.0%
Neurology 17.6 12.4%
Pain/ Analgesics 28.4 7.4%
Respiratory 28.8 10.4%
Nutrients/ Vitamins 26.3 8.8%
Others 41.2 12.6%

Source : Crisil
sanofi aventis launching almost 15 on-patent products in India with an eye on high
value life style related therapeutic segments.
Changing focus in CRAMS
l
India is today recognised as a global manufacturing hub, with nearly 40-50 percent
lower production costs than the US and the largest number of FDA approved facilities
outside the US. Several Indian companies jumped on to the Contract Research and
Manufacturing Services (CRAMS) bandwagon during the first phase, which was
characterised by manufacturing low value high volume intermediates, APIs and
carrying out clinical trials. Strong domestic and international competition has already
brought down margins in these traditional segments. The global consolidation may
trigger optimisation of assets both in manufacturing and research thus affecting the
future business of contract service providers. CRAMS companies could be at a
disadvantage during negotiation of contracts with the consolidated entity as the
quantum of work offered by a single entity would potentially increase.
Break up of Indian Contract Manufacturing Market

Intermediates
11%
Solid
17%
Dosages
34% Liquids
5%
API
55% Injectables
12%
Source: Frost & Sullivan

CRAMS players are increasingly looking at niche areas such as oncology and other
high-potency APIs. Antibody drug conjugates (ADCs), which are monoclonal
antibodies linked to cytotoxic small molecules, is another area where contract
manufacturers are looking to expand. Increased outsourcing in the biopharmaceutical
2010 space also presents the contract manufacturing companies with new avenues for
growth. Finished product/ dosage form, injectables manufacturing and lypholisation
services are the other areas where globally contract manufacturers, such as Lonza,
are moving up the value chain and looking at fortifying their positions in China and
India.
Global Biopharmaceutical Market (USD billion)

160
140
120 37
%
11.6 32
100
29
80 28
27
60 25.5
25
24.5 103
22 88
40 78
68
50 57
20 40 44
36
0
2006 2007 2008E 2009P 2010P 2011P 2012P 2013P 2014P
Mammalian Microbial
Source: Frost & Sullivan
Biologics
l
The biologics market was estimated to be nearly $ 70 billion in 2008. Though this
appears small compared to the overall pharma market, there were 150 deals
announced in 2008 alone worth nearly $ 94 billion. These deals mostly involved
pharma majors like Roche (Genentech), Eli Lilly (ImClone Systems), etc. Closer home,
sanofi aventis recently acquired Shantha Biotech. Four biologics made the top ten and
seven biologics made it into the top twenty selling drugs of 2008. US biopharma
companies alone spent over $ 65 billion in R&D last year. This has led to a very robust
product pipeline with several drugs in late stages of development. Regulatory and
market acceptance of biosimilars (generic version of biologics) will lead to an even
larger market post patent expiry of biologics.
M&A, strategic alliances to increase
l
Increasing number of global acquisitions have been made in the recent past by Indian
companies for strategic objectives like market entry, technological or manufacturing
expertise and distribution facilities. The global market continues to offer these
opportunities for domestic companies looking to expand their international presence.
Strategic tie-ups with global companies offer several opportunities for Indian
companies to create 'win-win' situations, particularly in R&D and distribution.

The consolidation amongst global majors is expected to translate into stronger
competition for Indian companies, especially in the global market. This may result in
more frequent and longer litigations for generic drug manufactures, thereby
increasing costs and making them financially vulnerable.
2010
New success stategies
Indian companies are well placed to adapt to the changing scenario and identify
emerging opportunities where they can effectively compete and succeed. The Indian
industry needs to take immediate action to protect its home turf and partake of the
huge domestic formulations opportunity of $ 14 billion by FY2013. Indian companies
need to broaden their product portfolio to include growing therapeutic segments
such as anti-diabetics, central nervous system and cardiovascular. Companies can now
sell premium products to aspiring Indian middle and high income classes, while at the
same time continue their focus on low value but high volume bottom of the pyramid
class.
India has already made a mark in CRAMS with contract manufacturing of generic
drugs. Indian companies need to sustain their competitive advantage by consistently
focusing on reducing costs and moving up the value chain. Contract manufacturing of
innovator drugs is an area that offers great potential for the future. Focusing on
meeting end to end needs of innovator companies and moving up the value chain to
higher value segments like cancer related drugs or high potency APIs would enable
Indian companies to provide better value and charge higher margins. Contract
manufacturing of final dosage forms and injectables offer the opportunity for better
margins and lower competition from other low cost countries. Biologics is an area
where Indian companies can look at actively serving the market and taking
leadership. Indian companies cannot afford to miss the bus on biologics. This market
is still in nascent stage and offers a first mover advantage to companies which can get
their product market strategy right. However unlike the traditional pharma segment,
MOVING UP THE VALUE CHAIN IN CONTRACT MANUFACTURING
Indian companies
positioned to serve
high value markets
Cytotoxic and high
potency APIs
Specialty Opportunity to
share in value
creation Innovator APIs
Reg. intermediates and

complex chemistry
Generic APIs non registered

intermediates (simple chemistry)
Likely Domination
Basic Raw of China
Generic
Material
Tactical Nature of customer relationships Strategic
Source: Kotak, Tata Strategic Research

entry barriers are very high in this space due to the investment involved. Biologics
based companies in the west, which have previously received funding from venture
capitalists may now find it difficult to raise cash under the current economic scenario.
This presents a good opportunity for Indian pharma companies with significant cash
2010 on their balance sheet to scout for suitable targets to gain market and technology
access.
Indian pharma companies need to accelerate the transition from reverse engineering
of generic drugs to development of new molecules. The Indian industry needs to
develop and improve capabilities in novel drugs and delivery mechanisms. Several
companies are developing their capability in NCEs but the inflexion point for the
domestic industry will be the launch of its own patented drugs. Domestic companies
should continue their focus on innovation to develop New Chemical Entities/New
Molecular Entities (NCEs/NMEs) which will offer sustainable revenues going forward.
Increasing collaboration with global pharma companies help in sharing costs and
risks, while ensuring better results. In-licensing/out-licensing by pharma companies is
an area that should be actively considered.
The current environment is challenging, but at the same time it throws up several
new opportunities for Indian pharma companies. What worked in the past may not
necessarily hold them in good stead in the future. Companies which take advantage
of the fundamental changes the industry is going through and re-jig their strategies
accordingly will be able to not only successfully navigate the future, but also rewrite
the rules of the game.

Contract research - Deriving
strategic value from emerging
markets
Global pharmaceutical companies are re-looking at their R&D processes in order to
leverage the opportunity presented by emerging economies, such as India, in contract
research. Besides offering the opportunity to save costs tactically in the short term,
this is also a strategic move to improve productivity and develop further capabilities in
order to compete successfully in the future, while staying close to geographies which 2010
will drive future growth; say Aleksandar Ruzicic of Roland Berger Strategy
Consultants and Jeffry Jacob of Tata Strategic Management Group
Matching R&D footprint with long-term growth in emerging

markets
Globally pharmaceutical companies are under immense pressure with existing
business models under threat. The growth is expected to taper off in the US and
other developed countries while emerging economies are expected to drive a large
part of the future growth. Until 2020, pharmerging countries will represent more
than a quarter of the healthcare and pharma market value globally. These markets
will contribute almost half of the absolute growth for both the healthcare and
pharmaceutical markets (Refer Figure 1). Hence, it does not come as a surprise that
pharmaceutical companies have started to boost their footprint and presence in
these locations and also elevated these regions organizationally. For example,
GlaxoSmithKline has created an Emerging Markets unit in June 2008 headed by Abbas
Fig. 1: Geographic shift towards pharmerging markets (USD Bn)

Assessment of shift Healthcare market Pharmaceutical market
Share of healthcare and 1,250 - 450 -

pharma market value of 5,400 9,900 4,500 800 1,500 700
pharmerging countries 17%
more than doubling 26% 29%
35% USA 38% 7%
between 2009 and 2020 USA 43%
4%
Share of absolute 14%
14%
healthcare and pharma 5%
19% Europe 19% 8%
market value growth Europe Top 5
22% 49%
between 2009 and 2020 Top 5 6%
Japan 11%
larger than 40% Japan 7% 43% 27%
26% Pharmerging 12%
Pharmerging 12%
Other 20% 22% 23%

Other 16% 14% 12%
2009 2020 D 2009 2020 D
Source: EIU; OECD; WHO; IMS; Roland Berger
Hussain and executed numerous acquisitions and direct investments resulting in a

significant part of its workforce being located in emerging markets.
Declining productivity, relatively dry pipeline for new drugs, increasing penetration of
generics and margin pressures have been leading to lower profitability for global
pharmaceutical companies. This trend is expected to further intensify going forward
into the future. This has forced companies to continuously adapt their cost structures,

Fig. 2: Core competencies across the value chain
Distribution/ logistics Quotes from Top
1% Research Executive Interviews
12% "We have paid for the same pre-
Sales Discovery
clinical work USD 120,000 in
2010 22% 6% Pre-clinical

3% development
China, which would have cost us
USD 5 million in the US"
"Data management can already
16% Clinical be outsourced to places like
development India, for example leveraging IT
24%
companies such as Tata
6% Consultancy Services"
9% Regulatory
Marketing "Emerging markets do provide
1%
Pharmaceutical Active ingredient cost savings potential for clinical
production production development which need to be
balanced with the demand for
R&D Production clinical data generated in the
Marketing and sales Distribution US/EU"
QUESTION: What are the top 3 core competencies of your company concerning
the following steps along the value chain?
Source: Top executive interviews; Roland Berger Survey 2007/2008
Fig. 3: Pharmaceutical Companies R&D Budget Split

R&D Budget break-up (%) Clinical Budget break-up (%)
16 Phase IV
11
4
38
20
67 Phase II
27 and III
Clinical Development Discovery

Non-clinical Regulatory 18 Phase 1
Others
A study by the Tufts Center for the Study of Drug Development concluded that:
Pharma companies with high reliance on CROs stay closer to schedule than others
CROs expand the speed and capacity of product development pipeline while
maintaining high levels of quality
CROs help companies reduce costs
Source: Secondary research, Zinnov, Tata Strategic Analysis
as exemplified by major multi-billion cost cutting/restructuring projects in all major

pharmaceutical companies, as announced most recently in September 2010 by the
Roche group that is not affected by imminent significant patent expirations.
The pharmaceutical industry is fundamentally re-evaluating the make-up of its value

chain, differentiating clearly between core capabilities and those that could be
potentially outsourced. Within R&D, particularly pre-clinical and discovery seem to be
representing potential outsourcing opportunities, also driven by huge cost differences
(Refer Figure 2 & 3). In the future, the pharmaceutical industry will be forced to
capture the increasing benefits from emerging countries, particularly given the long-
term benefit from matching better its global work force footprint to the future
geographic distribution of revenues.
The initial wave of pharma outsourcing was successfully witnessed for manufacturing
of Active Pharmaceutical Ingredients and off patent drugs. As late as 2006, contract

manufacturing accounted for over 70% of the revenues of the Indian CRAMS market.
However post compliance with WTO norms on intellectual property, there has been a
spurt of off-shoring activities in the areas of clinical development and manufacture of
patented APIs and formulations, as well as discovery and pre-clinical services.
2010
Multitude of key success factors in R&D drive relevance of
emerging countries
Many key success factors for pharmaceutical R&D apply equally to all phases, such as
the availability of highly skilled English speaking staff, adherence to quality and
compliance, flexibility and agility given significant attrition, costs per unit (related for
example to activity, FTEs, patients) and tight project management. In addition,
exploratory R&D also requires IP protection, trained/ experienced scientists/
researchers, speed of learning/ know-how development, access to academia/ basic
research labs, as well as access to funding whether public or private. In case of
confirmatory R&D, the key success factors are driven by fast access to patients, local
regulations for animal/ clinical studies, overall speed for critical path activities, e.g.
data analysis upon database lock of clinical trials, access to product approval
regulators and cost/benefit assessment agencies in key markets as well as strength of
relationships with medical opinion leaders driving product adoption through
international and national guidelines.
Pharmaceutical companies need to decide on their geographic footprint by assessing

the various locations rigorously against the suggested key success factors. In addition,
we suggest differentiating outsourcing decisions by activity type (differentiating
ongoing/ repetitive tasks from projects) and outsourcing option (off-shoring leading
to a strategic cost advantage vs. outsourcing within US/ EU/ Japan). Near and off-
shoring seems to be equally driven by unit cost advantages, e.g. animal studies, as
well as critical resource access, e.g. patients meeting clinical trial inclusion criteria,
experienced medicinal chemists.
Fig. 4: Selected R&D examples by outsourcing option and activity type

Complexity
Competitive Medicinal
Intelligence Chemistry
Low cost
off-shoring CMC for Animal
Optimization Studies
Outsourcing option
Pivotal
Trials
Pharma IT
Outsourcing Services
to US / EU /
Japan
Advertising
PMS Studies
Reporting
Ongoing/ Projects
repetitive tasks
Activity type

India's strong positioning on the key success factors
India's large population of 1.15 billion people translates into a vast patient pool and
faster patient recruitment for clinical trials, which go a long way in meeting overall
2010 timelines faster. This results in substantial acceleration of the drug development time
in addition to lower costs per patient. In addition, India has a large population of
doctors and scientists, representing the largest English-speaking talent pool in some
disciplines. For example, India produces three times as many master graduates
annually in chemistry than the US. With the large number of DMF filings, technical
competency is well established. It has the largest number of USFDA approved
facilities outside US with GMP and GLP certifications. Intellectual property is
respected and the laws are conducive to IP protection. Moreover, Indian strength in
synthetic and medicinal chemistry makes it a lucrative destination for contract
research, even for early research and discovery activities. Given the advantages of
focus, cost and speed, the question is no longer about whether to outsource but
rather of finding the right partners. Overall, clinical development, discovery and non-
clinical services costs account for 85% of R&D budget which can be reduced by using
CROs. In addition to cost advantages, multinational pharmaceutical companies
benefit from staying closer to schedule and their ability to expand speed and capacity
of their R&D operations while maintaining high levels of quality resulting in a much
required boost of R&D productivity (Refer Figure 4).
Moving up the value chain ladder

Contract work in research/ discovery has evolved from low end research activities to
more value added high end research. Reputation for research quality, speed in project
execution, world class infrastructure, quality manpower, patent protection and strong
client relationships are critical for growth of CRAMS. Currently clinical trials account
Fig. 5: Indian CRO Industry
CRO segments in Break up of Development Break up of Clinical

India stage in India studies
(Focus on generic
drug development) Phase IV, Phase I,
10% 7%
Discovery, 20%
BE/ BA Studies,
Phase II,
37%
30%
Clinical studies,
Development 63% Phase III,
stage (Clinical), 53%
80%
(Focus on new
drug development)
Availability of large patient population in diverse therapeutic category is the major

driver for growth of CRO - Clinical Trial in India
Cost of clinical trials is a fraction compared to developed mark ets like US
Source: Crisil Research, Tata Strategic Analysis

for the largest share of the Indian CRO market (Refer Figure 5). Increasingly, Indian
CRAMS such as Jubilant Biosys are striving for end-to-end solutions, integrating a
large array of services into a holistic offering, particularly within Discovery/ Pre-
clinical. Furthermore, Indian CRAMS have also started to engage in performance-
based contracts enabling them to retain a larger share of their value-added, as 2010
exemplified by the collaboration between Jubilant Biosys and Endo on the area of
oncology.
Outsourcing in drug discovery occurs mainly in the following segments - broad based
screening, genomic targets, chemistry and gene therapy. Therapeutic areas involved
include oncology, infectious diseases, CNS, cardiovascular disorders, autoimmune/
inflammation and metabolic diseases. Currently Phase II-III has emerged as the most
established component of clinical development. The adoption of new tools and
techniques such as biotechnology, bio informatics, genomics etc. along with new IT
solutions has brought about a change in the way new drugs are being developed and
brought to market. This will increasingly drive outsourcing of research and
development to India, also due to its strong IT services sector (Refer Figure 6).
Data management and early phase trials offer immense opportunities for CROs. There
have been several Private Equity (PE) investments in the recent past, driven by
current attractive returns and future potential. Actis' investment in Veeda Clinical
Research, Kotak Private Equity Group and 3i Capital in Siro Clinpharm, OrbiMed in
Ecron Acunova and MPM Capital in Sai Advantium are some examples. Actis Biologics
is working together with the Malaysian government on new molecules for diabetes,
anti-cancer diagnosis, and asthma and also jointly building the Bio-City Park in
Malaysia. 'Developing country' diseases offer another area of huge potential where
the focus of Western drug companies is currently limited. The long term arrangement
between the Malaysian government and Vivo Bio for manufacturing malaria vaccine
is one such example.
Fig. 6: Indian CRO Industry

Indian CRO Revenues, Leading Indian CROs
2002 -2010e (USD Mn.)
R
C AG
62%
1020
485
202
22 70
2002 2004 2006 2008 2010e
Illustrative list of areas addressed eg. GVK Bio:
Medicinal chemistry Informatics
Biology Process R&D
Clinical research BA/ BE Studies
Knowledge process outsourcing
Source: Secondary research, Zinnov, Tata Strategic Analysis

Contract research (and manufacturing) offers a long term
strategic advantage
The nature of relationships between Indian CRAMS suppliers and the pharma
2010 companies is transitioning from transactional based to long term partnerships, often
involving sharing and creation of joint intellectual property triggering performance-
based milestone payments. Big pharma companies are also acquiring stakes in their
CRAMS partners to secure supply and develop a stronger relationship.
It is a foregone conclusion that pharmaceutical and biotech companies need to relook

at their business models if they have to successfully compete in the new
environment. Contract manufacturing was just the tip of the iceberg. If companies
have to be really successful and optimize their operations for better business results,
they need to revamp their R&D process and capture the opportunity presented by
emerging economies. Price realizations that the pharma companies have got used to
may be a thing of the past, especially with focus on reducing final cost of dose by
payers and governments even in the developed world. Off-shoring contract research
(and manufacturing) services are therefore an opportunity to not just save costs
tactically for the short term, but also a strategic move to improve productivity and
develop further capabilities, while also moving closer to the future healthcare
customers in developing markets.

Raising India's 'Pulse' rate
With a focused and integrated approach, India has the potential to produce more
than double the current output of pulses, say Pratik Kadakia and Jeffry Jacob of Tata
Strategic Management Group
2010
A lot has been written about the sharp rise in pulses over the past few months. The
government too has announced several measures to control prices. While these short
term measures may succeed in controlling the prices to some extent, we need to take
a long term perspective if we are serious about developing a sustainable solution to
this issue.
Pulses or 'daal' are an integral part of the average Indian meal. A large proportion of
the Indian population is vegetarian and pulses form the main source of protein. The
protein content in pulses is about 18-25%. This makes pulses one of the cheapest
sources of protein for human consumption. However, the per capita domestic
production of pulses has declined from 60 g/day in 1970-71 to 36 g/day in 2007-08.
This is despite India being the largest producer of pulses in the world with 25% of
total production, 30% of total consumption and 32% of global acreage under pulses.
Productivity of pulses in India has been very low at 638 kg/ha, compared to best in
class yields of ~1,900 kg/ha in Canada and USA.
India: Potential for Pulses Production (Mn tons) Indicative
2
3
4
37
4
28
15
Current HYV Pest Irrigation/ Storage/ Increased Additional Total

Production Seeds Management Nutrient supply Transportation yield Area Availability
25% increase in 25% increase 20% increase
20% due 15% increase
increasedue Increase due to
yield due to use due to pest to supply of
of due to proper additional area
of HYV seeds management irrigation and
irrigation and storage (Rice fallows &
(Potential 35- (Potential 30 nutrients
nutrients (Potential 20%) intercropping)
(Potential 20-25%)
40%) 40%) (Potential 20-25%)
(c) Tata Strategic Management Group

The World Health Organization recommends 80 g/capita/day of pulses consumption
for India. Based on expected population growth, India will require ~38 Mn tons of
pulses by 2017-18 to avoid protein deficiency. Considering the current domestic
production levels (15.1 Mn tons in 2007-08), this is a huge gap which needs to be
2010 addressed if we have to be self-sufficient in pulses. If India has to meet the above
projected demand, it would have to either double its acreage at current yield levels or
double the yield keeping acreage constant. Since either of the above may not be
feasible in isolation, the country needs to look at a mix of both.
There are several reasons why pulses have not received the attention they deserve.
Pulses in India are considered a residual crop and grown under rain-fed conditions in
marginal/ less fertile lands with almost no focus on pest and nutrient management.
Heavy weed infestation, blue bull and pests destroy over 30% of standing crops
before harvesting. In addition, there are post harvest losses during storage due to
attack by pulse beetle. This has resulted in pulses being considered a risky crop by
farmers and yield levels being amongst the lowest in the world.
Tata Strategic Management Group recently undertook a study in the area of pulses
and looked at some of the best practices prevalent in other countries; some of the
important observations of the study are:
Market development and ensuring profitability

Pulse growers associations in USA and Canada focus on developing newer markets
(eg. animal feed, food ingredient industry). Governments ensure easy access to credit
including providing non-recourse market assistance loans.
Promoting good agronomic practices

Pulse growers' associations in Canada educate farmers on timely seeding, fertilization
and pest control for every crop cycle. Mechanized harvesting, usage of High Yielding
Varieties (HYV) seeds and recommended seed replacement practices are followed.
Focus on R&D
Investment in research is made by the Government and through growers' levy
collected from pulse producers. High yielding varieties and short duration crops
suitable for local conditions are developed and popularized.
Increasing area
Fallow substitution in irrigated lands has resulted in increased production in several
countries.
Improving efficiencies through aggregation

Pulse growers' associations help realize economies of scale along the value chain,
leading to better adoption of technology and infrastructure.
India has the potential to increase acreage by encouraging production of pulses in
rice fallows. A substantial part of rice fallow land can be targeted for cultivation of
pulses during the rabi season. Intercropping and growing short duration varieties

between kharif and rabi season, by relay cropping and intercropping, ensures further
utilization of existing agricultural land. Replacement of upland paddy with pulses is
another viable option which has the potential to give better net returns to farmers.
India's yield can be brought to world class levels by a mix of good agronomic practices
and farmer education. Usage of HYV seeds has the potential to increase yields by 25-
2010
35%. Innoculation of seeds with Rhizobium bacteria helps in better nitrogen fixation
and improves yields. Improving seed replacement ratio and ensuring timely
availability of certified seeds will help increase production further.
Proper pest and nutrient management are very important levers to increase
production of any crop. Appropriate nutrients, such as sulphur, zinc and phosphorus
help in improving plant biomass for pulses and result in better yields. Currently only
15% of the total area under pulses is irrigated as compared to an average of 46% for
all foodgrains. Providing scheduled and controlled irrigation can lead to increase in
yields. Irrigation requirements for pulses are much lower than other crops and could
be provided through sprinklers, etc.
Pulses need to be stored at optimum humidity conditions to prevent post harvest
losses due to attack of pulse beetles. These insects mainly attack whole grains and
not split pulses. By shortening the cycle time from harvesting to milling and storing
pulses in split form, these losses can be reduced drastically.
By extending crop insurance to pulses effectively, farmers would stop perceiving
pulses as a risky crop. Providing efficient sourcing mechanisms will provide the farmer
with security on assured off-take, which could further encourage farmers to grow
more pulses. Considering the measures listed above, India has the potential to
produce over 37 Mn tons of pulses. If India desires to achieve its true potential in
production of pulses, we need a focused and integrated approach to address these
barriers.

Water is everybody's business
"Water, water, everywhere, nor a drop to drink" - Samuel Taylore Coleridge's Ancient
Mariner was stuck in the middle of an open ocean. Although there was water
everywhere, it was not fit for consumption as it was salty. One can draw a parallel
from the poem when referring to the status of water resources in the world today.
Water is generally considered a "free good" that is abundantly available and unlimited 2010
in supply given that three-fourth of the Earth is covered with water. But the fact is
97% of the world's water is salty. Out of the 3% fresh-water only 0.5% is available for
human consumption (rest is in form of ice caps and glaciers). Population growth and
rapid urbanization, increasing affluence and living standards, industrialization and
expansion of business activities and climate change are globally increasing the
demand for water. Thus even though the world is not "running out of water", it is not
always available when and where it is needed. Also there is a wide disparity in
distribution of the water resources globally. China and India, with more than one-
third of the world's population, have less than 10% of the world's water.
Water Issues in India

India has nearly 4% of the world's water resources. Of the average annual 1,869
Billion Cubic Metre (BCM) of available water in India, only 1,120 BCM is available for
consumption. Surface water accounts for nearly 60% of the available water resources
while groundwater resources account for the rest. Due to some of the reasons
mentioned above, demand for water has been growing at a rapid pace in the past.
The water demand, currently estimated at 710 BCM, is expected to increase to nearly
1,180 BCM by year 2050, thus exceeding the supply (Fig 1).
Fig 1 : Water Demand (in BCM)

1150
843
710
2010 2025 E 2050E

Total Water Availability = 1,120 BCM
Source : Planning Commission, Ministry of Water Resources, Tata Strategic Estimates
Fig 2 : Per Capita Availability of Water (Cubic metre) vs Population Growth

2,000 P er 2,500
Cap
Per Capita Availability of
i
Wat e t a
Water (Cubic Metre)
r
Population (Mn)
1,600 A va 2,000
ilabi
li ty
1,200 1,500
800 on 1,000
P op u lati
400 500
0 0
1991 2001 2025 2050
Year
Source : Ministry of Water Resources, Govt. of India

Fig 3 : Annual Per Capita Availability of Water
per year (Cubic Meter / Population)
10,837
2010
Global Average of Annual Per Capita Water
Availability (2002) = ~ 7,700 Cubic Meter
4,624
2,259
1,820 1,878
1,154
118
Saudi South India Germany China Mexico USA

Arabia Africa
Source : FAO: AQUASTAT (2002)
Though India currently has adequate water resources, an analysis of the water
availability on a per capita basis indicates that India is moving towards 'water
stressed' (i.e. < 1,700 m3 / Capita / Year) level (Fig 2).
Also, India compares lowly in terms of per capita availability of water when compared
to the global average (Fig 3). The spatial unevenness in water availability across the
country, given the wide variation in rainfall, only exacerbates the situation.
Also, the present infrastructure in the country is limited, in terms of long-distance
transmission lines or network of canals, to carry water from water surplus regions to
water scarce regions. Thus in arid regions in India, women and children wake up early
to travel long distances to collect water. The situation in urban India is also quite
dismal with most of the cities receiving very limited quantities of water. Often the
freshwater that is available in form of rivers and lakes are contaminated as untreated
industrial or household waste water is released into them. All these have led to
increasing dependence on groundwater. The result has been a steady depletion in the
groundwater levels in many parts of the country. In Punjab for example, while
groundwater has helped flourish the agriculture sector, there are reports of
groundwater being overdrawn in several blocks of the state. This has led to alarming
deterioration in the quality of water leading to diseases like flourosis and cancer.
Similar cases of over-drawing of groundwater are also extensively prevalent in water-
starved states like Gujarat and Rajasthan.
So what are the solutions to this impending water crisis?
Emerging Solutions
There could be many ways one can address the issue of saving and conserving water.
For that, it is critical that users of this resource namely the agriculture, industry and
the household sector become aware of the fact that water needs to be conserved and
used efficiently. Large costs involved in building dams and rapid depletion in
groundwater levels are forcing newer means of water provision/ conservation of
existing water.
In this regard, one of the solutions is Rainwater Harvesting, an age old technique of

Fig 4 : Water Regulatory Environment
Govt. policies governing Water Supply Govt. policies governing Water Pollution
National Water Policy (2002) Water Prevention and Control of Pollution Act,
Prioritises rights on water
Promotes PPP in water projects
1974 and Environment Protection Act (EPA),
1986
Defines strict norms for sewage and
2010
Supports rationalization of water tariffs at
ULB level effluent discharge
State level Ground Water Control / Regulation Established pollution control board at
Act State level to enforce effluent standards
Control usage / withdrawal of ground MINAS (Minimum National Standards)
Regulatory standards defined for effluent discharge
water and stipulates recharging of
Environment for a wide range of industries
ground water
Rain Water Harvesting Regulations (City level National River Conservation Scheme
acts) Central Public Health and Environmental
Stipulates rain water harvesting through Engineering Organisation (CPHEEO)
roof and ground water recharging Guidelines (Centre)
through open wells / bore wells Custom duty exemption for import of treatment
Provides norms of rain water harvesting equipments
the collecting, storing and recycling of rainwater (surface/subsurface) for irrigation

and other uses. In India, several state governments have made rainwater harvesting
mandatory. For example in cities like Ahmedabad, Mumbai, Bangalore and Indore,
rainwater harvesting is mandatory for all buildings covering an area of over 1,500
square metres. Rainwater harvesting is also practiced globally. At the Frankfurt
Airport, Germany, water is collected from roofs of the new terminal in underground
tanks and is later used for toilet flushing, watering plants and cleaning. This results in
savings of approximately 100,000 m3 water/year.
The need to reduce water footprint in irrigation is leading to the emergence of low
pressure micro-irrigation techniques such as drip irrigation and sprinkler irrigation
that save about 40% water as compared to traditional methods. The wastewater
treatment represents a promising solution in addressing the water scarcity issue. The
wastewater treatment consists of physical, chemical and biological treatments leading
to generation of recycled water, which can be used in variety of non potable
applications in the industry and agriculture sector, environment & recreation and also
for groundwater recharge. With usage of suitable technology, treated water
equivalent to drinking water can be obtained. In Tokyo, municipal wastewater is
treated through sand filters and then chlorinated for use in toilet flushing in business
facilities. Florida uses treated wastewater for more than 50% of its requirements.
While there are several innovative ways to manage the existing water resources,
there is also a need to explore newer sources of water. Many coastal regions are
looking at the desalinated seawater as the alternate source of water. The fact that
Desalination technology is an expensive option, in comparison to conventional
sources of water, has been the main reason for its limited adoption.
Government of India, through various policies and regulations, is trying to encourage
conservation of water as well as reduction of water pollution (Fig 4). It is also
encouraging solutions like rainwater harvesting and wastewater treatment. Schemes
like Jawaharlal Urban Renewal Mission aim to develop infrastructure in cities and
towns with financial assistance in forms of grants. Water and sanitation sector
account for nearly 50% of the total allotted projects.

Fig 5 : Potential Private Sector Opportunities in Water Sector
1 Water Infrastructure
Water extraction projects like construction of
dams, canals
1
2010 Water
Laying of pipelines for water supply &
distribution
Sewerage collection pipelines
Infrastructure
2 Treatment Technolgoies
Installation of water treatment plants
Potential
Potential Installation of sewage / effluent treatment
plants
Opportunities
for Private
Private Installation of desalination plants
3 for 2
Sector
Sector
Water Treatment 3 Water Conservation
Conservation Technologies Drip irrigation
Rainwater harvesting
Watershed Management
Water as an Investment Opportunity

The solutions to addressing the water scarcity need large investments. These
investments may be for creation of new water assets or for operating and maintaining
the existing assets.
In this regard, private sector can play a major role in bringing in the necessary
financial resources as well as technical and managerial efficiency in managing such
water projects. Govt. of India is encouraging private participation in this sector
through PPP arrangement. Measures like Viability Gap funding are in place to
enhance attractiveness of water projects. Tata Strategic estimates the water sector
investment potential ~ USD 10-12 Bn (constant price) annually over the next 10 years.
A major share of these investments will be in civil work projects in irrigation and
water supply/distribution space. Also, increasing Government focus on reducing
water pollution and the need to tap into new water sources are creating lots of
opportunities in segments like water and wastewater treatment and desalination (Fig
5). Examples of such initiative include Tirupur Water Supply project on BOT basis,
Service Contract for Navi Mumbai domestic water and Chennai water desalination
plant on BOOT basis.
Given the abundance of demand across the value chain, the water sector is truly
emerging as a "Sunrise sector" of the next decade. This certainly presents business
opportunities for the private sector. In this regard, the Government should create an
enabling policy framework for PPP in water sector with particular emphasis on the
rationalization of water tariffs. This would go a long way in boosting the attractiveness
of water projects and create solutions much necessary to avert the impending water
crisis.

Well being in India: Disparity and
surprises across districts
The issue of income versus well being has been highlighted by Prof Stiglitz and others.
Well being, in the Indian context needs to consider a range of indicators representing
material and social factors. Computing a Well Being Index by district reveals wide
disparities - even in the same state. Even more surprising diversity amongst districts is
revealed by a Female Security Index. All organizations - Government bodies, NGOs
and businesses - need to look at relevant indicators at the district level for effective
2010
action planning and results, say Raju Bhinge, Chief Executive and Harsha Kapoor,
Practice Head- Analytics Solutions of Tata Strategic Management Group
There is an ongoing debate on whether per capita income adequately reflects the
quality of life and well being of a person or society. Eminent economists like Joseph
Stiglitz and Amartya Sen have suggested the use of a broader indicator covering
monetary, social and wellness dimensions.
In applying this approach in the Indian context, it is clear that such an indicator will
have to include ownership of basic amenities as well as access to quality of life factors
like hygiene, education and healthcare. Moreover, given the disparities across the
country, it is essential to look at a smaller geographical unit say, a district, instead of a
typical state.
A Well Being Index (WBI) has been created for India using eight key categories
(defined in Table 1) that broadly cover all aspects of well being. The categories are:
(1) Home amenities, (2) Kitchen facilities, (3) Education,
(4) Hygiene, (5) Entertainment, (6) Communication,
(7) Transportation & (8) Healthcare
Using NSSO household surveys data, a rigorous scoring methodology was used to
compute the WBI for each district in India.
Map 1 represents the district wise WBI colour coded for each of the five quintiles
(from best to worst).
Eastern and Central India are markedly worse than the rest of India. The Northern
states of Punjab, Haryana and Delhi are amongst the best. Evidently, some districts
Table 1: Definitions of Categories comprising Well Being Index (WBI)

Well Being Index (WBI) Map 1 Female Security Index (FSI) Map 2
2010
are better off than others. Even within the same state there is significant disparity
amongst districts. For instance, huge variation across districts in Karnataka is
noticeable: while Bangalore is amongst the 'Best', Bellary and Gulbarga are 'Bad' and
Bijapur, Koppal and Gadag are amongst the 'Worst'
While the WBI captures all major material and social parameters, it does not include a
very important reality of Indian society - the well being, status and treatment of
women. A number of parameters can be considered for this purpose. But there is a
paucity of reliable, consistent data, especially at the district level. With these
constraints, a Female Security Index (FSI) has been created using gender ratio (Census
2001) and crime against women (National Crime Records Bureau 2006, 2007).
Map 2 reflects the FSI colour coded in terms of quintiles (best to worst). As more
reliable data becomes available, the FSI can be redefined to make it more
comprehensive.
In terms of Female Security, there is a clear divide between North India on one side
and South & Eastern India on the other. The 'Worst' rating is found in Punjab, MP,
West UP, Haryana and Delhi. However, Uttaranchal and Eastern UP fare comparatively
better. Peninsular India is generally well placed. Some large states exhibit huge
disparities among districts. For instance, in Rajasthan, Dungarpur is classified as
'Best', Bhilwara is 'Good' while Alwar and Kota are among the 'Worst'.
A comparison of Well Being Index (Map 1) and Female Security Index (Map 2) reveals
some interesting and contra intuitive findings. There seems to be no correlation
between these two indices. Some of the most well off parts of India (Punjab,
Haryana, Delhi, & Western UP) as reflected in the Well Being Index have the worst
rating in terms of the Female Security Index (FSI). Likewise, some of the states
having districts ranking 'Bad' or 'Worst' on WBI (eg. Orissa, Eastern UP, WB,
Jharkhand, Chhattisgarh and Bihar) are better placed on Female Security.
Surprisingly, MP scores badly on both indices. In contrast, districts in Uttaranchal,
Gujarat and Kerala are consistently in the 'Good' to 'Best' range. The districts in the
large states of Maharashtra, AP and TN are 'Average' or better on both counts.
This analysis of well being vividly illustrates the diversity and disparity across districts,
often within the same state. Clearly, the typical state is too large a unit for any
meaningful conclusions to be drawn. The breadth of consumption patterns captured
at the household level in NSSO surveys enables a wide range of analyses at and within
a district.
Clearly, insights on district wise parameters and trends should be the foundation for
action planning and effective performance. This applies to all types of players -
whether a policy maker wishing to improve 'well being' in rural India, or an NGO
aiming to improve gender equality or a business house planning to increase the
penetration of its goods or services in the domestic market.
(Research and analytics inputs provided by Sachin Somaiya and Rituparna Dasgupta of Tata Strategic Management
Group)

Are family-owned businesses
sustainable?
Discussions and articles on management of family owned businesses (FOBs) often
focus only on corporate governance norms or effective succession planning as key
initiatives. However, several other challenges of growth and talent management do
not find adequate mention. Tata Strategic proposes a 'Composite Approach', as a
comprehensive framework to help FOBs in effectively managing key business 2010
challenges of growth, continuity and stability while also addressing family and talent
issues say Sona Rajesh, Practice Head-Organization Effectiveness and Amit Bajpayee
of Tata Strategic Management Group.
Family Owned Businesses (FOBs) have played a significant role in the growth of most
economies around the world. Leading Indian family businesses like Tata, Reliance,
Birla, Bajaj, Mahindra & Mahindra, etc have contributed immensely to the growth of
the Indian economy. Similarly, in developed economies, the contributions of family
businesses like Cadbury, Johnson & Johnson, Walmart, Ford etc. are tremendous.
In India during the pre-liberalization licence era, FOBs emerged as powerful
businesses adept at surviving in a protected economy. Post-liberalization, growing
business opportunity coupled with rising competition saw both the rise of several
FOBs and the fading away of others that failed to adapt (refer Exhibit 1).
For the purpose of this discussion, FOBs are defined as enterprises where family
members:
own a controlling stake in
l the business, and
have full time involvement in management either through board membership or
l
by occupying senior executive positions
Challenges of FOBs
Caselet: Research indicates that the likelihood of family businesses surviving under
family control declines significantly with every successive generation (Among family
owned businesses only 15% survive beyond the 3rd generation and only ~ 5% by the
4th generation)
In their quest for growth, continuity and stability, FOBs face certain challenges which
are unique to such businesses. They must address these to succeed and sustain over a
period of time. These challenges are as summarized below:
1. Family Challenges - Research on FOBs has shown that the unique strength of
FOBs in terms of strong family bonds prevails upto the 2nd generation but starts
diluting with generations thereafter. Family dynamics in an FOB can become
weaknesses with growing distance and, family being unable to focus on business
priorities.
2. Business Challenges - A multitude of business challenges ranging from pressures
on sales & profitability, increased competition, etc. are part of any business and
FOBs are no different. To effectively deal with such business pressures it is
imperative to have a cohesive top management and governance mechanisms
with clear roles, accountability, deliverables and authority for involved family
members and professional talent.
3. Growth Challenges - Economic reform has brought with it many growth
opportunities for businesses. However, growth leads to increased scale, diversity
of operations and often brings in varied investors, business partners and
professional employees beyond the family circle. Maintaining family traditions
and values in the FOB while letting go of some control to company management
can pose a serious challenge.

Exhibit 1: Leading FoBs (1964-2009)
ASSET SIZE MARKET CAPITALISATION (Figure in Rs. Cr)
Tata 369
Tata 7546 Tata 22345 Reliance Ind 432419
Birla Birla 7235 Premji Tata 239689

290 18439
2010 Martin
109 Ambani 3241
(Wipro)
Ambani 16060 ADAG 185176
Burn
JK Singhania 1829 Parvinder/ Bharti 158513
Thapar 71 7970
Malvinder
Bangur 65 Thapar 1763 Bajaj 7667 A Birla 82448
Sahu Jain 61 Mafatlal 1297 A Birla 7204 DLF 67174
Shriram 60 Bajaj 1228 Munjal 3715 Jindal 41282
Bird Adani 38021

58 Modi 1192 Mohan 3173
Heilgers
JK MA Jai Prakash 30457
54 1032 Wadia 2985
Singhania Chidambaram
Raju's
Sarabhai 54 TVS 909 4220 UB 27251
Satyam
MRTP Established (1964) Liberalisation (1991) Open Markets (2000) Open Markets (2009)
4. Talent Challenges - Business & growth challenges create dependence of FOBs on

professional talent for business success. However, talented and dedicated
professionals with growth aspirations expect a clear understanding of their
growth path, especially in senior management roles. Managing their professional
interests along with aspirations of involved family members is a key challenge.
Further, family dynamics directly impacting business can make an FOB less
attractive to talented professionals.
Ensuring long term sustainability requires -
l successfully resolving the multiple challenges of family, business, growth and
talent
l ensuring interests of all key stakeholders are addressed
The Composite Approach

Tata Strategic has developed a 'Composite Approach' as a suitable path towards
creation of sustainable FOBs (refer Exhibit 2).
1. Family and Business Governance: Delinking ownership from management
There are sufficient examples of business families demonstrating that dissent and
family disputes can directly impact business decisions and could hinder not only daily
operations but also future growth. Maintaining the delicate balance between
effectively handling family interests and business imperatives requires the company
to create an appropriate structure and guidelines to manage both these critical
aspects.
a) Corporate Governance Structure: A board of directors has the key responsibility
of protecting the stakeholder's interests, taking key business decisions and providing
direction to the businesses of the company. Regulatory guidelines and global best
practices provide a wealth of data on appropriate Board structures, their membership
and role of Board Committees. While only publicly listed FOBs are required to comply
with the corporate governance requirements, other FOBs will do well to comply with
the same in their long term interest.
b) Family Governance Structure: In addition, FOBs can be further strengthened by
establishing a 'Family Council' alongwith a 'Family Constitution'. The Council provides
a platform for family members to debate issues among themselves, express agreed
views through their appointed spokespersons and understand viewpoints of family
executives. Further, it acts as a channel for family executives to explain the firm's

Exhibit 2: The Composite Approach
Business
Challenges
Succession
2010
Family
Planning
Challenges
Challenges
Family
&
Talent
&
Business
Talent
Governance
Development
Growth
Challenges
plans, policies and progress at Council meetings and gain support for the firm's
strategy and major decisions from the family. The Constitution provides the
guidelines for membership of the Family Council, its role and selection, induction and
development of family members in the business.
Caselet: A prominent FOB in Saudi Arabia has transitioned over successive
generations from a single owner to siblings to a consortium of cousins as the
promoter family. To sustain growth, the FOB was assisted by Tata Strategic and the
following governance structure was created:
l Family Governance: Family council working as per a Family constitution and a
Junior Forum for training and coaching of young family members
l Business Governance: A holding company board to provide Group wide agenda
supported by sector boards to drive sector wise initiatives through operating
companies.
The Cadbury governance model laid out by Sir Adrian Cadbury provides an effective
model. The Family Council, as proposed by Sir Adrian Cadbury, provides a link
between the family and firm. It also provides a forum to keep the family informed and
engaged with the business.
Such governance models are highly effective in defining how to:
l Delink ownership from management control
l Develop a governance structure and an effective Board
l Plan for transition during succession or addition of talented manpower
l Create synergies among managerial resources through an effective structure
2. Talent Development & Succession Planning: Developing a capable talent pool
and next generation of leadership
Talent Development is an established need for any business to develop and effectively
utilize its human capital. In an FOB there is the added complication of simultaneously
managing family and professional talent and delicately balancing the interests of
both.
a) Family Member-Induction & Career Planning: Key issues in the development of
family members are their induction, growth path and assigning of appropriate roles
especially through their early and mid-career years. FOBs could choose between
several options whereby young family members gain valuable experience outside the
FOB or directly join the FOB. In some FOBs, family members join at entry level
positions while in some others they enter mid-management positions directly. A
close look at some examples from Indian businesses shows that the growth of family

members joining a business is often accelerated but the training and performance
feedback is not always structured. Family councils and their constitution can define
these aspects to ensure clarity and standardization of policies on such sensitive
issues.
2010 Caselet: "Any of the 21 members of the third generation who intends to join Hero
Honda will have to work for a company outside the Group and then go through a step
by step training process..
Once a family business crosses the third generation, it generally survives for many
generations after that".. Brij Mohan Munjal, Chairman Hero Honda Group
b) Succession Planning: Succession is a contentious issue especially when there is
more than one contender for a role. It is in the interest of both the family and
business that development of family talent and succession be professionally managed
to bring in the best prepared talent into key roles.
Caselet: As an FOB, the Murugappa Group has put in place some good practices. The
Group has several family members, across generations, involved with the business.
Over the years, the Group has streamlined the entry of family members into business
and succession issues through defined policy guidelines. A family member comes into
the business in a mid management role after completion of formal education and with
some industry experience outside of the Group and grows in the hierarchy, over a
period of time. The Murugappa Group has defined the retirement age as 65 years and
succession discussions are initiated by the Chairman with the Board.
c) Professional Talent Management & Development: Like all businesses, FOBs
depend significantly on professional talent to manage several strategic and
operational roles. While it is generally acceptable that family members will occupy
several key senior management roles, professional talent must see this as a fair
practice, if they are to be kept motivated and retained. Hence, induction of suitable
family talent, it's grooming, timely performance review and coaching must follow the
highest standards for them to be seen as competent to succeed.
With regard to its professional workforce, FOBs must invest in their development and
growth if they aspire to attract the best talent. Long term commitment from
professionals can be expected by FOBs only if they are seen to provide fair and
equitable opportunity for growth and some share in the profits like their peers from
the family.
In the future, family talent and professional talent may have to compete with each
other for key roles as competition intensifies and Boards look to bring in the best
talent to grow the organization and maximise wealth for the owners.
Conclusion
Today's tough business environment coupled with governance and talent issues can
pose a major challenge for growth and effective functioning of FOBs. By adopting the
'Composite Approach', FOBs can de-risk themselves from such challenges. FOBs that
are able to adapt and implement these practices will be well positioned to seize
emerging business opportunities while sustaining their family heritage.

2010
The Voice of India's Business Community

Established in 1927, FICCI is the largest and oldest apex business organisation in India. Its
history is closely interwoven with India's struggle for independence and its subsequent
emergence as one of the most rapidly growing economies globally. FICCI plays a leading
role in policy debates that are at the forefront of social, economic and political change.
Through its 400 professionals, FICCI is active in 39 sectors of the economy. FICCI's stand
on policy issues is sought out by think tanks, governments and academia. Its publications
are widely read for their in-depth research and policy prescriptions. FICCI has joint
business councils with 79 countries around the world.
A non-government, not-for-profit organisation, FICCI is the voice of India's business and

industry. FICCI has direct membership from the private as well as public sectors,
including SMEs and MNCs, and an indirect membership of over 83,000 companies from
regional chambers of commerce.
FICCI works closely with the government on policy issues, enhancing efficiency,
competitiveness and expanding business opportunities for industry through a range of
specialised services and global linkages. It also provides a platform for sector specific
consensus building and networking.
Partnerships with countries across the world carry forward our initiatives in inclusive
development, which encompass health, education, livelihood, governance, skill
development, etc. FICCI serves as the first port of call for Indian industry and the
international business community.
Contact
MR. R K BHATIA MS. RANJITA C. SOOD

HEAD, CHEMICALS DIVISION ASST. DIRECTOR, CHEMICALS DIVISION
FICCI FICCI
FEDERATION HOUSE, 1 TANSEN MARG FEDERATION HOUSE, 1 TANSEN MARG
NEW DELHI-110 001 NEW DELHI-110 001
Tel: +91-11-2331 6540 (Dir) Tel: +91-11-2335 7350 (Dir)
EPBX: +91-11-2373 8760-70 (Extn 395) EPBX: +91-11-2373 8760-70 (Extn 474)
Fax: +91-11-2332 0714/ 2372 1504 Fax: +91-11-2332 0714/ 2372 1504
E- Mail: rkbhatia@ficci.com E- Mail: ranjita@ficci.com

2010
Tata Strategic Management Group is the largest Indian Owned Management

Consulting Firm. Set up in 1991, Tata Strategic has completed over 500 engagements
with more than 100 Clients across countries and industry sectors, addressing the
business concerns of the top management. Today more than half the revenue of Tata
Strategic Management Group comes from working with companies outside the Tata
Group. We enhance client value by providing creative strategy advice, developing
innovative solutions and partnering effective implementation.
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2010

Handbook on Indian Chemical Industry 01

2. Finding concepts to run feedstock cost driven businesses also in non-upstream

02 Handbook on Indian Chemical Industry

Concepts for feedstock driven commodities

Handbook on Indian Chemical Industry 03

Implications for India

04 Handbook on Indian Chemical Industry

Global chemicals industry Fy 10

Total: USD 3,395 Bn

Source: Datamonitor, Tata Strategic Analysis

Handbook on Indian Chemical Industry 05

Indian Chemical Industry

06 Handbook on Indian Chemical Industry

Handbook on Indian Chemical Industry 07

08 Handbook on Indian Chemical Industry

Acetic Acid Formaldehyde Cumene

Indian Organic Chemicals Industry

1.5 1.6 1.5 1.5

FY 04 FY05 FY06 FY07 FY08 FY09

Handbook on Indian Chemical Industry 11

Production details of major organic chemicals in India

Demand and supply of methanol (Mn tons, Fy09)

Production Import Export Consumption

12 Handbook on Indian Chemical Industry

Sectoral usage of methanol

Handbook on Indian Chemical Industry 13

Demand and supply of acetic acid

Production Import Export Consumption

14 Handbook on Indian Chemical Industry

Demand and supply of formaldehyde

Phenol is a significant type of organic chemical with numerous applications as

Handbook on Indian Chemical Industry 15

Demand and supply of phenol

Production Import Export Consumption

16 Handbook on Indian Chemical Industry

Growth Forecast & Drivers

Methanol Market Outlook

Demand Production Operating rate

Source: Crisil report, Tata Strategic analysis

2. Rise in phenol demand: The demand of phenol is expected to grow at a CAGR of

Handbook on Indian Chemical Industry 17

2010 0.2 100

Source: Crisil report, Tata Strategic analysis

18 Handbook on Indian Chemical Industry

4. Low capacity utilization: Due to oversupply in global markets, prices of major

Handbook on Indian Chemical Industry 19

2010 2. Performance of Chemical & Petrochemical Industry at a Glance (2001 - 2007),

This report has been authored by:

20 Handbook on Indian Chemical Industry

Global Petrochemicals Industry

Global Market Size

Indian Petrochemicals Industry

Handbook on Indian Chemical Industry 23

Basic petrochemicals installed capacity and demand ('000 tons)

Even in the end products petrochemicals market (polymers, elastomers, synthetics

24 Handbook on Indian Chemical Industry

Polymers: Polymers are popularly known as plastics, Polyethylene, polystyrene,

End product petrochemicals market: share (% of total)

Handbook on Indian Chemical Industry 25

Segment Major Products Main Applications

Competitive Landscape - Polymers Industry

Major polymers facilities in India (FLY10)