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13 April 2017

The Skilling Juggernaut

Comprehensive view on Skill India reform

Entering new financial year

Taking cognizance of the macros and nifty valuations

Understanding e-NAM
A critical reform in attaining vision of Doubling Farmer Income

Government spending in FY18

Taking cautious view backed by various data points

Future Hospitals
How technology can change the healthcare industry

Electric Cars on the horizon

Industry transitioning and where does India stand

The changing source of energy consumption

A report reasons this transition which can impact some conventional ways

Office Space sharing

An emerging area in India
Skilling Juggernaut
Anilesh S Mahajan March 20, 2017

When Shruti Malik drives past farmland being ploughed on the outskirts of Yamunanagar, Haryana, she
has reason to feel proud. She knows one of the men on the tractors at work was once her student at IRIS
Learning, the skilling institute she runs in the town, which has so far trained 2,400 young people in
sugarcane cultivation, polyhouse farming and the use of different kinds of agricultural implements. After a
month-long training stint at IRIS, Rakesh Sandhu bought a tractor with a loan from the Pradhan Mantri
Mudra Yojna - a scheme to facilitate micro business ventures begun in 2016 - which he hires out (with
himself as driver) for a fee to farmers around Yamunanagar who need their fields ploughed.

"After the training, my students command a premium," says Malik. "Many of them are in great demand in
neighbouring districts as well." Malik herself quit her job with Sapient Nitro in Gurgaon within six months of
joining to pursue her dream of becoming an entrepreneur. IRIS Learning, which she set up in 2015, is one
of the 4,526 skilling centres in the country which partner with the National Skill Development Corporation
(NSDC) - under the National Skills Qualification Framework - to combat India's gigantic skills shortage.
Apart from agriculture-related skills, IRIS also provides training for prospective electricians, fitters, mobile
phone repairers and more. "I don't regret my decision to give up my well-paying job at all," she says.

India's youthful demographic ensures it produces 10-12 million job seekers a year, but only 10 per cent of
them are trained in some employable skill. The education most receive does not equip them to land jobs.
In comparison, 96 per cent of similar job aspirants in South Korea, 80 per cent in Japan and 75 per cent in
Germany, are trained. Yet India needs skilled labour much more than these other countries - the late
management guru C.K. Prahalad had estimated in 2007 that the country would require a skilled workforce
of 400 million by 2022, including 130 million for newly-created jobs. It is lack of skills rather than absence
of employment opportunities that is responsible for the unemployment rate in the country being around five
per cent. Also, according to the Economic Survey 2014/15, 92 per cent of all employment is in the
unorganised sector. Economists have estimated that India's skills shortage constrains its gross domestic
product (GDP) by as much as two percentage points.

To reconcile the situation, the government has embarked on a massive exercise, setting up a separate
Ministry of Skill Development and Entrepreneurship (MSDE), with Rajiv Pratap Rudy in charge, and
allocating it a budget of `6,000 crore over three years. The ministry has its task cut out - to convince more
young people with limited means to attain specific skills rather than pursue graduation; to get companies to
pay skilled entrants better than their unskilled counterparts; to convince companies to employ skilled
aspirants rather than train their own; to combat lack of infrastructure, bureaucratic sloth and growing
automation. But most of all, it has to anticipate demand and provide the right courses which lead to prompt


Industrial Training Institutes (ITIs), run by the National Council for Vocational Training, now under the
MSDE's purview, have been around for decades. There are 13,106 of them, both government and
privately run, with a capacity to train 1.87 million aspirants a year in 127 different trades. But in practice,
the ITIs run only two courses - that of fitter and electrician - which have any demand: they attract 1.1
million students a year. The remaining courses struggle to attract candidates. Indeed, many employers
confided that most ITIs were in bad shape, with obsolete training equipment, outdated courses and
uninterested teachers.

When Rajat Goel was setting up EyeQ in 2007 - a chain of eye-care centres in Tier-III/IV towns - he did
not have much of a problem enlisting ophthalmologists. The problem arose while trying to recruit his
support staff of operation managers, operation theatre technologists and hospital managers: employable
ones were few and far between. "The courses required to train such people are either not available or
obsolete," he says. Finally, in 2013, Goel decided to set up his own training institute for these particular
skills at his eye hospital in Rohtak, Haryana, even though, for a company like his with a modest turnover of
`45 crore, investing `2 crore in skilling alone was a risk. The step has proved unexpectedly successful, with
459 people having been trained by EyeQ so far, while the demand for such training has seen the
company's turnover rise close to Rs 100 crore.

"The availability of skilled labour determines the capacity of any business to take advantage of new
opportunities," says Anil Chaudhry, Country President and Managing Director, Schneider Electric India.
But it is precisely that which is lacking. To make up for it, like Goel, innumerable companies - from the
smallest to the widely known - run their own in-house training programmes. "We are investing around `55
crore to train certified carpenters, retail store staffers, managers and more," says Juvenico Maetzu, CEO,
IKEA India, which is set to open its first store in the country, in Hyderabad, later this year, and is investing
`1,000 crore in the project. Small enterprises, however, find it difficult to afford such investment, more so
because, as one industrialist, who prefers anonymity, says: "Within a year, people we train move out,
getting more lucrative opportunities."


A recent EY report notes that though India produces six million graduates every year, most of them are not
"industry ready" - cannot be employed immediately. EY's figures are frightening - the 'unprepared' include
93 per cent of MBAs, 80 per cent of engineering graduates, 83 per cent of hotel management graduates
and 97 per cent of accounts graduates. "My cook recently asked me if I could employ his son in any of my
factories," says R.V. Kanoria, Chairman and Managing Director, Kanoria Chemicals and Industries. "But
the boy could not write a simple job application." To add to the problem, educated youth fail to realise how
ill-equipped they are for the jobs they think are their due. The Employment and Unemployment Survey
(EUS) 2016 notes that 58 per cent of unemployed graduates and 62 per cent of such post graduates said
they were jobless because they were not being offered jobs worthy of their education. "It is a painful task
to tell such people that graduation does not help to find jobs and they should acquire skills instead," says
Rohit Nandan, former MSDE Secretary.

Maetzu, IKEA India's head, notes many of those he interviews for blue collar jobs, lack aspiration. "They
ought to take pride in their work, which they don't," he says. "I began my career on the shop floor and
gradually rose in the organisation." Yet Indian youth remain obsessed with graduation and white collar
jobs. "My family wanted me to do a BA and get a good job," says Rajiv Kumar, a student at a Delhi ITI. "I
came to ITI only because my close friend joined it and I wanted to be with him." Ikram Hussain, learning
hairdressing at an upmarket Delhi salon, was already ambivalent about the profession. "I think I would
have earned more and led a more respectable life had I done my graduation and got an office job," he

Those who know better, from Kanoria to Malik of IRIS, despair of this attitude. "The mindset needs to
change," says Kanoria. "The world is changing, job profiles are changing." Malik notes that IRIS holds
kaushal shivirs (skilling camps) every month to convince more young people to seek skills, but the
conversion rate - between those attend the camps and those taking up courses - is barely 30 per cent.
"Young people think only school dropouts should learn skills of the sort we teach," she adds. "We try hard
to convince them it is not so."

Why not include some of the skills employers seek in the school curriculum itself? "We are working with
governments in the states of Haryana, Himachal Pradesh and Kerala to make some vocational courses
compulsory, on a pilot basis, from Classes VIII to X," says a Human Resource Development Ministry
official. "The learning from this effort will be applied in other states." In Germany, for instance, basic
courses in carpentry, knitting and electrical work, were introduced in schools in the 1990s. Other countries,
including the US, the UK, China and South Korea, have followed suit. "It is the educational system we
have that is responsible for the obsession with graduation," says Anirban Roy, founder of SEED, which
works with corporate houses to impart skills.


But in the last few years, a concerted effort has been made. Nor is the MSDE working alone. Already, 21
other ministries have taken up the gauntlet of providing skill training, for which a staggering `17,273 crore
has been budgeted this year. The textile ministry, for example, has programmes for training in traditional
handloom, handicrafts, wool knitting and silk weaving, apart from courses in spinning, weaving and other
aspects of garment manufacture. The rural development ministry, as also the ministry for minority affairs,
are also supporting courses in handloom weaving and handicrafts. The civil aviation ministry is working
with Boeing and Airbus to create a one-year course to make diploma holders employable in the aviation
ministry. Others like the Tatas, BHEL, Alstom, GE, Siemens and Toshiba are also working with
engineering colleges to make their course content more industry oriented.

Indeed, a Committee of Secretaries (CoS) is working on a plan to converge all these training efforts by
ministries other than the MSDE. It has already shifted the training institutes run by the ministry of small
and medium enterprises, the ministry of tourism and the ministry of north east region to the MSDE. "The
convergence of all skill development schemes is critical to ensure a holistic, outcome oriented approach,"
Minister Rudy told Business Today. "It will not only enable consolidated and well-thought programmes, but
also avoid overlap and minimise the chances of leakages." He wants a synergised skill implementation
effort, with the ITI network strengthened further and modernised, the NSDC's own training centres - called
Pradhan Mantri Kaushal Kendras - extended to every district headquarters. He is also keen that the sector
skill councils (SSCs) be made more flexible and industry oriented. He even wants the All India Council for
Technical Education (AICTE), which grants recognition to technical institutes - and is currently with the
HRD ministry - under his ministry's ambit.

There are three aspects to the MSDE's skilling programme: creating a pool of labour with the skills modern
industry needs, setting up finishing schools where white collar workers acquire the additional skills needed
to be competent at their jobs and involving states more actively in the effort. Finance Minister Arun Jaitley
has promised to provide funds to increase the number of Kaushal Kendras from 60 to 600, as well as to
set up another 100 Indian International Skill Centres, which will train Indians to take up overseas jobs.
Financial provision for these projects has been raised from `2,173 crore in the last financial year to `3,016
crore in 2017/18. Rudy is also working with the Central Board of Secondary Education (CBSE) to give ITI
students the equivalent of a Class X or XII school leaving certificate and offer a parallel academic pathway
after completing the ITI course.

There are also numerous skilling programmes being conducted by

state governments. But the Centre now wants common norms,
common qualifications and curriculum. The respective industry
bodies have set up 46 SSCs and norms are being developed in
partnership with them - from plumbing to finance to IT & ITES and
including, beauty & wellness, construction, hospitality, retail,
tailoring, accountancy, travel and tourism, soft skills and spoken
English. These norms provide common definitions of training,
placement, expected duration of courses and procedure to seek
finance. "It makes sense to push skill development with a single
concentrated force. The task is huge, and scope for failure is none,"
says Pramod Bhasin, founder of Genpact, who now, along with
DLF's Pia Singh, run Skill Academy, headquartered in Gurgaon.

A consolidated skilling programme also helps skilling

entrepreneurs. "We can then focus on skilling rather than diverting
our energies towards compliance and chasing payments," says
Mansi Agarwal of Mumbai-based UpSkill, which runs vocational
training courses in Rajasthan and Gujarat. "At present, every
ministry has its own targets and compliances. But thanks to the
MSDE, common norms, qualifications and curriculums are being
developed." But convergence doesn't come easy. "There is always
turf conflict in government," says a department secretary. But
others differ, insisting the glitches can be overcome. "The job is
huge, so we need to avoid duplication, bring in some rationality,"
says a secretary from another ministry. "The turf war is pass;
now the discussion is on who can provide the training better," says

The functioning of the Pradhan Mantri Kaushal Vikas Yojana

(PMVKY), under which the government provides short-term
courses of all kinds, has already benefitted from being under a
single ministry, the MSDE. Synergy will only help programmes
currently under other ministers. "The institutes carrying out R&D, or
providing higher professional qualifications in addition to skilling,
will remain with the same ministry as before," adds Nandan.

"Most job aspirants don't lack the hard skills required to do a
particular job, but the softer ones," says Agarwal of Upskill. "This includes self confidence, high standards
of personal hygiene, a sense of discipline, an ability to adapt to the new world." She has found that as
important as imparting knowledge related to a course is the job of teaching her students, for instance, how
to use a western-style toilet, prevent body odour, wear ironed clothes and speak confidently.
Relevant skill training could also put the brakes on migration to big urban centres which are already
overcrowded. "If you give people good working conditions in the place where they are based, opportunities
to grow and inspirational jobs, they will not feel the need to migrate," says former CEO of NSDC, Dilip
Chenoy. It is also important for industry to appreciate the skills aspirants bring with them, "There are still
companies that prefer to hire unskilled labour and train it themselves," says R.C. Bhargava, Chairman,
Maruti Suzuki India Ltd. "This allows them to get away with paying lower wages." There is also overall
industry reluctance to hire, mainly due to the complex web of labour laws. Skill does not get the
appreciation it deserves. "Leave aside industry, do we pay extra to an electrician for doing a job
efficiently," says R.C.M. Reddy, CEO and Managing Director, IL&FS Education.

But at the same time, the shift of certain industries such as retail or beauty and wellness from the informal
to the formal sector is helping skilled aspirants. "Mere skill development doesn't solve all problems. One
needs to put one's heart and soul into the job," says Ajay Shriram, Chairman, DCM Shriram Group. He
advocates more liberal labour laws and pins hope on the return of the investment cycle post the
implementation of the Goods and Services Tax and other key reforms for employment to pick up.

Again, increasing automation is another looming threat for job seekers. "Smart factories are the in thing,"
says an industrialist, preferring anonymity. "Automation makes operations management efficient and also
reduces the chances of defects in products." Many are looking at increasing their use of machines and
robots in areas such as packing, fitting, welding, painting, and more. "Technology is changing every day,"
says Manish Sabharwal, Chairman and co-founder of recruiting company TeamLease. "SSCs need to be
flexible in creating these job roles. New job seekers need to be ready to grab new opportunities."

In mid-2015, the National Democratic Alliance (NDA) government amended the Apprentices Act, 1961, to
allow employers to fix hours of work and leave as per their discretion and provide apprenticeship training
to non-engineering graduates and diploma holders as well. This has opened up employment for trainees in
new trades, including IT-enabled services.

It was followed by the National Apprenticeship Promotion Scheme in September, by which the government
promised to reimburse 25 per cent of the stipend paid to trainees to employers directly. "The idea was to
encourage more on-job training," says Nandan.


The states have their own problems, which Rudy has to grapple with. A sub-committee of chief ministers
decided that there should be state chapters of SSCs as well. These are being set up, but challenges
remain. Five states - Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh and West Bengal - make for more
than half the 239 million people projected to be added to India's population between 2009 and 2026. "Not
only do these states score low on many development indicators, they lag on economic parameters as well
compared to the southern and western states," says Ashok Varma, Partner at PricewaterhouseCoopers.
Most of the jobs will be created in the better-off states, while most of the job aspirants will be in the less
developed ones. Now that the BJP has won a massive mandate in Uttar Pradesh, the challenge for the
new government would be to make the state a skills hub.

The NSDC has been asked to carry out a district-wise mapping of skills requirements and gaps. "We are
also trying to understand the requirement of skills elsewhere in the world. Our candidates should be
competent enough to seek a job anywhere," says Nandan.
On October 17 last year, the MSDE revamped the flagship PMKVY scheme, linking payments to training
partners with completion of training and achievement of a certain minimum placement (roughly 70 per
cent). The new plan made it mandatory for training partners to track placements of students. "Once you
start tracking your student for a year, you can understand where your course content may be going
wrong," says R.C.M. Reddy of IL&FS Education. "This pushes skill centres to offer those courses which
ensure job placement," says the head of another skill centre, preferring anonymity. According to official
data till April 25, 2016, only 81,978 of the 1.76 million trained candidates were placed, while only 577,000
candidates have been certified since the launch of the scheme in July 2015. "Placements will improve if
job creation improves," says Malik of IRIS. "The payment cycle from the MSDE has improved. We get 80
per cent of the payment by the time the student completes the course and the remaining only if we
manage 70 per cent placement."

Indeed, the ministry bears the entire training cost under PMKVY, which varies from a minimum of `7,600 to
a maximum of `20,000. Training of unarmed security guard, for instance, requiring 150-200 training hours,
costs around `7,600; while that of a technician for the auto sector, which takes about 500 training hours,
costs `20,000. Admission is open to youth from poor families with the minimum qualification of having
passed Class X. Aspirants have to take a basic aptitude test to determine the interests and abilities.
Course material and even practical training are all provided by the centre.


Another challenge is creating a pool of competent trainers. Rudy has tied up with the ministry of defence to
rope in retired officers for the job, but agrees that more needs to be done. "Many of the sector skill councils
have not achieved the standards required for trainers either," says Anita Rajan,
Chief Operating Office, Tata Strive, the Tata Group's skilling initiative. "To even
teach in school, people undergo formal training, but there is no such training for
trainers here." Reddy of IL&FS Education sees a solution in technology. "We have
standardised the course content, and through the internet we can stream it even to
remote areas," he says.

In the meantime, ex-servicemen are being roped in to impart training, especially in

electronics, signals and logistics. "We hired a few of the trainees and trained them
further to be training partners," says Malik. Many corporate houses are also urging
employees to undergo the trainers' programme. The centres at and near bigger
cities still attract reasonably good trainers, but the challenge lies in providing them
in the hinterland.

The ruling NDA is pursuing a skilling strategy which differs in some ways from that
of the erstwhile United Progressive Alliance (UPA) government's. Between 2008
and 2012, the UPA government formed three bodies to further skill development:
the Prime Minister's Office-led Council on Skill Development, the National Skill
Development Coordination Board and the NSDC. Former TCS CEO S. Ramadorai
was roped in with the rank of cabinet minister to assist the effort.

The NDA government has brought in the states too, with the MSDE given the
responsibility to coordinate all efforts. In December 2015, NITI Aayog's Sub-Group of Chief Ministers, led
by the then Punjab Chief Minister, Parkash Singh Badal, submitted its report asking for more knowledge
sharing with states on programmes and experiences of skill administration. Seven sub-missions were set
up which would work alongside the NSDC, the NSDA and Directorate of Training. "Every state has its own
priority and preferences," one of the chief ministers pointed out.

Madhya Pradesh Chief Minister Shivraj Singh Chouhan told BT that he is taking skill development as a
mission and has roped in Symbiosis Group of Institutes, Pune, to set up a skills university in the state.
Similarly, Chief Minister of Jharkhand, Raghubar Das, roped in Singapore-based Institute of Technical
Education to set up a skilling centre in the state. The two have very different plans. Chouhan is looking to
cater to the demands of local industry, while Das is looking at opportunities across the world. "India has
the potential to become a hub of skilled labour, and must leverage this demographic dividend," he told BT.

Meanwhile, Rudy has also got clearance to recruit a new cadre of officers for skill development alone.
These officers will man most of the skill development-related activities at state and district levels. Similarly,
states also have been asked to recruit dedicated provincial officers - a distinct step away from the UPA's
strategy of working through private players. "During the UPA's tenure, skilling was like a start-up, but now
it has transformed into a full-fledged scaled up project," Ramadorai told BT, a fortnight before he resigned
his position.

However, in the UPA's tenure, many states, including Gujarat, then led by Narendra Modi, refused to
follow the UPA model of skill development but devised their own. The Gujarat model included settings up
of Kaushal Kendras at block level, after mapping local aspirations and business needs. Madhya Pradesh
announced its own technical education and skill development policy in 2012, and other states like Tamil
Nadu, Uttar Pradesh, Karnataka and Punjab followed suit. But coordination with the Centre - despite the
National Skill Development Coordination Board, headed by the then Planning Commission Deputy
Chairman Montek Singh Ahluwalia - remained a challenge.

Earlier autonomous, the NSDC and NSDA now have to work under Rudy's MSDE.
There have been murmurs over the past year that government role in skill
development has been increasing to the detriment of private players. The murmurs
were especially loud when former NSDC CEO Dilip Chenoy and his COO Atul
Bhatnagar abruptly resigned in October 2015. A Comptroller and Auditor General
report was subsequently critical of NSDC's functioning under Chenoy and
Bhatnagar, maintaining that while almost all the capital in NSDC came from the
government's coffers, private parties held 49 per cent equity. "Rules were laid
down before I took over and private parties adhered to them," says Chenoy,
defending himself. Minister Rudy feels differently. "We can't let private players
make bounty on the government exchequer," he says. "I feel there was some
bungling somewhere."

Clearly, the Modi government is firing on all cylinders to skill India. If it succeeds in
its mission, it will not only provide employment opportunities to the youth but also
boost economic growth significantly.
India - Strategy Portfolio change

11 April 2017 Institutional Equities

Towards an upturn
The Indian economy seems to be recovering faster than expected RealGDPgrowthislikelytorecoverinFY18
from the demonetisation shock. This coupled with strong external RealGDPGrowth(YoY%)
growth ou tlook im plies a better than e xpected gr owth ou tlook. 10
The resilience of labour market will allow for faster normalisation
of co nsumption. Co rporate e arnings near-term however w ill 8
remain under-pressure p artly due t o re cent cu rrency 7.8
appreciation. The big picture however is that corporate profits are 6.9
6 6.6
depressed a nd w ill mean-revert i n t he next c ouple o f ye ars if 6.2
growth continues to remain strong. Market valuations are on the 5.4
higher side implying lim ited s cope fo r f urther r e-rating of t he 4
market. In vestors sh ould t hus focus on stocks an d sect ors with
strong earnings outlook. Overweight domestic consumption. 2

Economic re covery fa ster than e xpectation: The I ndian e conomy is 0

seeing fa ster-than-expected recovery f rom d emonetisation-led sl owdown,
FY13 FY14 FY15 FY16 FY17ii FY18ii
due to a resilient la bour market. U nemployment h as actually f allen in
recent mo nths. This should a llow for faster no rmalisation in c onsumption Source:CMIE,IIFLResearch
demand. In addi tion, s trong global growth ha s meant that e xport growth
has also been strong in volume terms. Consequently, we are increasing our CorporateprofitasashareofGDPislowestinmorethanadecade
FY18 GDP growth estimate to 7.4% (GVA basis) from 6.8% before. PAT(%ofGDP) Average
Near-term ea rnings ou tlook clou dy; mea n rev ersion t he key: Near- 7
term corporate earnings outlook will remain challenging, due to high starting 6
estimates an d the rece nt appreciation in the c urrency. We exp ect rup ee
appreciation to result in 3-4% downgrade to earnings (ex-financials). From a
medium-term p erspective, h owever, m ean revers ion in corp orate p rofits 4
from t he current h ighly de pressed le vel ho lds the key to continued 3
outperformance from equities. Corporate profits at 2% of GDP are currently
2ppt below the long-term average. 2
Portfolio strategy f ocus on earnings v isibility: Given demanding
valuations in m ost sect ors, w e fo cus on st ocks an d sect ors wi th st rong 0 FY00
earnings vi sibility and low r isk o f mul tiple c ontraction. Ac cordingly, we
are overweight s taples, f inancials and e nergy. W e a re unde rweight o n
IT, phar ma and indus trials. Our to p l arge c ap buys ar e: H CLT, HPCL, Source:CMIE,IIFLResearch.Basedonastandalonefinancialsofmorethan15,000companies
Motherson, P owergrid and Ye s Bank. O ur to p mi d c ap buys are : Ci ty
Union, Deepak Nitrite, Indraprastha gas, MCX , Supreme Industries

Ashutosh Datar Amit Tiwari | |

91 22 4646 4642 91 22 4646 4649
Institutional Equities India - Strategy

At the be ginning o f the y ear, our expectation was that it wo uld be a Figure2: Unemploymenthasfallendespitethedemonetisationledslowdown
difficult year for stocks, given uncertainty presented by de monetisation UnemploymentRate
and tr ansition to G ST later i n the ye ar. T he s harp r ally in t he mar ket
has thus surprised us. In par t, this reflects a c ombination of less-than-
expected adverse i mpact o n the economy due to d emonetisation an d 10
expectation of a quicker and stronger recovery in the next few months.
Figure1: PMIhasalmostrecoveredtopredemonetizationlevels 6
Manufacturing PMI ServicesPMI 4
53 0












The other area where things have been better than expected is exports,
45 reflecting t he b uoyancy i n gl obal econ omy. Although in va lue t erms
export g rowth i s st ill an aemic, i n vol ume t erms exports ar e seeing a












strong u ptick. Exp ort t raffic a t m ajor p orts, f or exa mple, i s g rowing a t
the fastest pace i n seven years. Whi le the recent appreciation in r upee
Source:MarkitEconomics,IIFLResearch will affe ct expor ts for a fe w quar ters down the line , at least the ne ar-
term outlook remains robust, especially if the global economy continues
GDP growth st ronger recovery likely: While the precise impact of to see strong growth.
demonetisation o n the r eal e conomy i s s till unclear, gi ven pauc ity of
data o n the unor ganised par t of the economy, i t do es appe ar that th e
overall impact has not been as severe as expected. The biggest surprise
for u s h as b een t he re silience of t he l abour market. D ata f rom C MIE
suggests a s harp f all in une mployment, c ompletely c ontrary to our
expectation. U nless, t his s harp f all is d ue t o a f all i n p articipation r ate
(for whi ch we do no t h ave data), thi s s uggests that the labour mar ket
has b een fa r m ore r esilient th an exp ected. Th is b odes w ell for
normalisation in consumption demand in the current quarter.

ash u t o sh .da ta r @i i fl cap. c om 2

Institutional Equities India - Strategy

Figure3: Exportsporttrafficgrowthisnearmultiyearhigh Figure4: RealGDPgrowthislikelytorecoverinFY18

(3mma,YoY%) PortTraffic (Exports) RealGDPGrowth(YoY%)
40 10

30 8
20 7.8
6 6.9 6.6
10 6.2
0 4
(30) 0
Jan10 Apr11 Jun12 Aug13 Oct14 Dec15 Feb17 FY13 FY14 FY15 FY16 FY17ii FY18ii
Source:CMIE,IIFLResearch Source:CMIE,IIFLResearch

Consequently, we are increasing our FY18 GDP growth forecast to 7.4% Figure5: RBIisunlikelytocutpolicyratesthroughthecourseofthecurrentyear
(GVA b asis) from 6 .8% b efore. Th is is b roadly i n line w ith con sensus (%) 3mTBill RepoRate
and the RB Is p rojection. Ho wever, es timate f or gro wth i n FY18 i s s till 12
lower than the projections just before demonetisation, suggesting there
could be upside to growth estimates if global growth remains strong and 10
monsoons are normal.
GST potent ial for s hort-term di sruption: The transition to GST is
now just a couple of months away. Although we do not have any doubts
on the long-term positive impact of GST on the economy, there remains 4
potential f or di sruption in t he s hort r un, gi ven the s cale o f c hange.
However, gi ven the recent e xperience wi th de monetisation, wh ich was 2
an e ven bi gger di sruption f or the economy, a nd i ts li mited i mpact, we
believe di sruption to th e e conomy f rom G ST i s li kely to be s mall a nd 0
short-lived a t b est. H owever, it is likely t hat t he m arkets a re o ver- Jan10 Mar11 May12 Jun13 Aug14 Sep15 Nov16 Dec17
estimating some of the benefits from GST in the short term. Most of the Source:CMIE,IIFLResearch
beneficial impact o f G ST i n terms of i mproved tax c ompliance, mor e
formalisation of the economy, and hi gher productivity are likely to play Interest rates t o remain st able, as i nflation re mains w ithin
out o ver 2-3 y ears r ather than i n the immediate 1-2 quar ters, i n o ur comfort zone: A consequence of faster-than-expected growth and shift
view. in the stance from MPC to neutral means that interest rates are likely to
remain st able for t he next f ew q uarters. While t here could b e s ome

ash u t o sh .da ta r @i i fl cap. c om 3

Institutional Equities India - Strategy

monetary tr ansmission f rom bank s i n te rms o f l owering the MCL R, Figure7: Commoditypriceshaveincreasedsharplyinrecentweeksbutrupee
money market rates a re al ready l ow due to ple ntiful liquidity. Thus, b y appreciationhasprovidedcomfort
and large, we are at the bottom of the interest rate cycle, in our view. LMEMetalsIndex CRBCommodityIndex
Figure6: CPIinflationislikelytoremainbelow5%forthirdconsecutiveyearinFY18
(YoY%) CPIInflation
12 20

10 10
9.9 0
8 9.4
5.9 (20)
4 4.9 4.9 (30)
2 Jan12 Aug12 Apr13 Dec13 Aug14 Apr15 Dec15 Aug16 Apr17
FY13 FY14 FY15 FY16 FY17ii FY18ii Earnings - d owngrade c ycle likely t o co ntinue in n ear-term:
Source:CMIE,IIFLResearch Despite economic g rowth l ikely t o su rprise our exp ectation at t he start
of the year, corporate earnings have c ontinued to s ee d owngrades, as
Our v iew on i nflation has no t c hanged muc h. W e continue to e xpect we expected. And thi s is despite the general perception that r esults for
another year of sub-5% inflation (the third consecutive year), although the De cember qua rter were by and l arge be tter than e xpected. T hus,
inflation will tick higher in FY18 relative to FY17. The uptick will largely consensus e xpectation of ag gregate BS E200 PA T h as seen a 3 %
be driven by normalisation in food inflation, which has fallen sharply in downgrade si nce t he st art of t he y ear. Th e d owngrades f or t he m ore
the l ast f ew mo nths due to a bump er crop and th e i mpact of widely tracked but narrow Nifty Index are 4.5%.
demonetisation o n p rices of p erishable agr i pr oducts. Al though
commodity pr ices have i ncreased, the r ecent s harp appr eciation in
rupee and low domestic capacity utilisation will keep hi gher commodity
prices fr om fe eding i nto g eneralised in flation. F urther, w age pr essures
are also muted. Monsoon is a wildcard at this point of time. However, as
FY15 a nd F Y16 showed, a lo wer monsoon d oes no t n ecessarily imply
higher food and overall inflation.

ash u t o sh .da ta r @i i fl cap. c om 4

Institutional Equities India - Strategy

Figure8: Earningsestimatescontinuetoseedowngrades Figure9: Consensusestimatesseemoptimistic,evenexcludingPSUbanksandmetals

(%) companies
FY18Earnings changesince31Dec2016
0.0 BSE200EarningsGrowth(YoY%) FY16 FY17E FY18E
(0.5) ConsumerDiscretionary 9.9 (2.1) 31.0
ConsumerStaples 12.9 6.9 16.0
Energy 13.6 19.6 6.1
(1.5) Financials (25.4) 41.0 27.7
(2.0) HealthCare 19.6 15.1 16.9
(2.5) (2.8) (2.7) Industrials 41.1 9.2 19.9
(3.1) InformationTechnology 8.6 5.2 8.0
Materials (39.1) 88.4 41.6
RealEstate 1.7 25.6 12.6
BSE200 BSE200ExPSU Nifty NiftyExPSU
Banks,Metals Banks,Metals TelecommunicationServices (10.1) (32.1) (20.4)
Utilities 17.4 7.8 19.1
companiesthathavedatafortheperiodofFY15FY18E BSE200Index (1.0) 19.2 18.7
BSE200ExPSUBanks,Metals 12.5 8.5 14.5
Although a t a h eadline le vel, c onsensus expectation is f or earnings Source:Bloomberg,Company,IIFLResearch.Note:Basedon174BSE200companiesthathavedata
growth t o mo derate slightly i n FY18 th is is i n l arge par t du e to hi gher fortheperiodofFY15FY18E
earnings gr owth f or the vo latile me tals c ompanies and PSU ban ks.
Excluding t hese, c onsensus e xpectation i s for a sh arp ac celeration i n With no minal G DP g rowth li kely to be i n l ow do uble di gits and gi ven
profit gr owth to 14 % i n FY18, al most 6ppt h igher than in FY17e . In elevated corporate margins for m any companies i n the domestic sector
particular, t he d omestic con sumer an d c yclical sectors a re expected t o (excluding com modities), we b elieve t he d ownside ri sk t o con sensus
see a sharp acceleration in earnings in FY18 earnings estimates continues. The recent sharp appreciation in rupee is
another add ed headwi nd f or c orporate earnings. In the pas t thr ee
months, the Indian r upee has app reciated by 5-5. 5% agai nst mo st
major cu rrencies su ch a s t he U SD, C hinese R enminbi, Eu ro, a nd t he
British Pound. While this reflects a general trend of US Dollar weakness,
the r upee has c ontinued to o utperform mos t o ther EM c urrencies and
thus, the rupee has appreciated even i n trade-weighted terms. At l east
in the s hort-term, thi s reduces c ompetitiveness of d omestic pr oducers
relative to overseas producers.

ash u t o sh .da ta r @i i fl cap. c om 5

Institutional Equities India - Strategy

Figure10:INRhasappreciatedsharplyagainstmostmajorcurrenciesoverlastfew Figure11:CorporateprofitasashareofGDPislowestinmorethanadecade
months PAT(%ofGDP) Average
115 6
90 2
85 1
80 0

Jan16 Mar16 Jun16 Aug16 Nov16 Jan17 Apr17
Source:Bloomberg,IIFLResearch.Rebasedto100ason01Jan2016 eachyear

Although o n o ne han d th is appr eciation w ill a lleviate s ome of the Valuations above average: Equity markets have been buoyant in the
pressure f rom rising c ommodity prices, that b enefit would be relatively first thr ee mo nths of 2 017 wi th do uble-digit r eturns f or the l arge-caps
modest and would be more than offset by likely downgrades to earnings and m ore t han 2 0% return for smaller-cap com panies. Wh ile t he
to c ommodity and e xporting s ectors. O ur bal lpark c alculations s uggest economy remains o n a we ak wi cket re lative to pr e-demonetisation
that 3-4% appr eciation in e xchange r ate (v s. USD) w ill r esult in 4 % levels, t he b uoyancy in m arkets r eflects a n exp ectation of st rong
downgrade to FY18 earnings f or c ompanies under o ur c overage recovery i n the economy f rom the demonetisation-led slowdown, ai ded
(excluding financials). Sectors such as metals, energy, and IT wi ll bear by G ST, the bi g s tructural r eform ki cking in l ater thi s ye ar. Thus,
the d isproportionate i mpact o f cu rrency ap preciation. Th us, consensus expectations are clearly running high and reflect in the sharp expansion
earnings estimates are likely to see further downgrades in the next few in valuation multiples.
weeks. W e b elieve that e ventually, corporate earnings growth for F Y18
is likely to settle at around 10% from the current mid-teens estimate. The Ni fty i s tr ading at mo re than 22x tr ailing PE or m ore than 1. 5
standard de viation abo ve i ts l ong-term ave rage. Si milarly, the br oader
Earnings dep ressed from a medium-term pers pective; catch u p BSE200 i ndex i s tr ading at 1. 8 standard d eviation abo ve i ts l ong-term
the ke y: Beyond the near-term, the bi gger picture i s that c orporate average. In a bsolute terms, t hese m ultiples lo ok ve ry egregious.
profits are highly depressed relative to long-term average, reflecting the However, one c omforting fact or i s t hat d omestic c ost of cap ital has
prolonged do wnturn i n the investment c ycle. Co rporate pr ofits ar e fallen si gnificantly in the p ast cou ple of y ears. Th e yield on the
currently just above 2 % of GDP as agai nst a long-term average of 4 % benchmark 10-y ear gover nment bo nd ha s f allen 200bps i n the pas t
of GDP and a peak in FY08 of almost 7% of GDP. Unless the profit cycle couple o f ye ars t o p ost g lobal f inancial c risis lo ws o f le ss t han 7 %.
starts reverting to the me an, s ustained o utperformance f rom s tocks Adjusting fo r th is fa ll in c ost o f c apital, a lthough va luations ar e s till
would be difficult in the medium term. above t he l ong-term a verage, p rima fa cie t hey d o n ot l ook q uite a s

ash u t o sh .da ta r @i i fl cap. c om 6

Institutional Equities India - Strategy

egregious a s he adline v aluation m ultiples a ppear, e specially b ecause Figure13:Earningsyieldgaphasworsenedabitduetorisingyieldsandequitymarkets

corporate earnings, in aggregate, are quite depressed. (bps) BSE100YieldGap Average
Figure12:BSE100trailingPEratioismorethanonestd.deviationabovelongterm 500
(x) BSE100Trailing PERatio +/ 1Std.Dev Average
30 100
10 Jan03 Oct04 Jul06 May08 Feb10 Dec11 Sep13 Jun15 Apr17
5 Source:Bloomberg,IIFLResearch.Note:CalculatedasBSE100earningsyieldminus10YrGSecyield.

0 Domestic l iquidity t he k ey s upport for t he m arket: Do mestic

Jan03 Aug04 Mar06 Oct07 May09 Dec10 Jul12 Jan14 Sep15 Apr17 inflows in the equity market remain robust. Thus, in just the first three
months o f the y ear, d omestic mutua l f unds have re ceived mo re than
US$6bn of inflows in their equity funds.
Given this backdrop, one has to accept that th ere is little, if any, scope Figure14:DomesticequityMFscontinuetoseelargeinflows
for further r e-rating of st ocks, especially s ince t he e ra o f l ow co st of (US$bn) Equity EPFO
capital is pr obably be hind us , no t jus t g lobally but a lso i n I ndia, g iven 15
the shift in the stance by MPC. Thus, one has to look to earnings growth Domestic MFEquityCollection
as be ing the p rimary driver of e quity re turns and ho pe that i nvestor
optimism o n India k eeps v aluations unc hanged. Thus, equity r eturns 10
mimicking e arnings gr owth i s the bes t-case outcome f or s tocks i n the
next few quarters in our view. 5

FY13 FY14 FY15 FY16 FY17

ash u t o sh .da ta r @i i fl cap. c om 7

Institutional Equities India - Strategy

A s ignificant s ource f or i nflows wi th do mestic mutua l f unds i s the s o- overweight, g iven the mac ro re covery and thus i mproving e arnings
called sy stematic i nstalment p lans ( SIPs) wh ere m onthly i nflows n ow outlook. Ou r overweight st ance on en ergy w ith a p reference f or t he oi l
total ~US$700m on a gross basis. In addition, the decision by Employee marketing com panies con tinues. We change o ur st ance on fi nancials to
Provident Fund O rganization (EPFO) to i nvest 5% o f i ts incremental neutral, r eflecting a c ombination o f s tructural and c yclical ta ilwinds f or
inflows i nto e quity mar ket has bee n a major contributor to i nflows f or private financials offset by concerns over valuations.
domestic funds. A large part of this flow is sticky, and thus, this liquidity
support to the market is likely to continue in the near term. Figure15:Portfolioallocationtable
Sector Niftyweight IIFLrecommendedweight
On one hand, domestic flows in the equity market are robust and on the ConsumerDiscretionary 10.9 12.0
other hand, FP Is hav e tur ned ne t buy ers o f Indian s tocks i n the last
ConsumerStaples 8.7 10.0
quarter (f rom ne t sellers i n the p receding quar ter). Thus, thi s wal l of
liquidity c hasing d omestic s tocks is a f actor be hind t he s trong Energy 11.6 15.0
performance of Indian stocks. In a sense, there are n o major sellers in Financials 33.2 33.0
the market! HealthCare 5.5 5.0
Industrials 5.8 6.0
Portfolio strategy focus on earnings delivery
Despite ou r slightly op timistic m acro vi ew, we b elieve i nvestors should InformationTechnology 12.6 9.0
continue to buil d c onservative p ortfolios with a c lose atte ntion to Materials 6.2 5.0
earnings risk and valuations. That said, the changed macro outlook and RealEstate 0.0 0.0
especially t he ch anged cu rrency outlook w arrant a ch ange i n ou r
TelecommunicationServices 1.8 1.0
portfolio. Accordingly, we move the IT sector to neutral and H ealthcare
sector to unde rweight f rom over weight be fore, gi ven adde d h eadwinds Utilities 3.6 4.0
from currency and the consequent uncertain earnings outlook. Aggregate 100.0 100
Source: NSE, IIFL Research
Given ou r vi ew of a fa ster r ecovery i n d omestic ec onomy, e specially in
consumption, we change ou r st ance on st aples an d d iscretionary t o

ash u t o sh .da ta r @i i fl cap. c om 8

Spark India Strategy
eNAM A Path Breaking Reform in Agri Supply Chain

eNAM electronic National Agriculture Market is creating a single national agricultural market for sale and
purchase of agri-produce by connecting fragmented agricultural markets (called mandis) on an online trading Date April 3, 2017
portal. After evaluating the nuts and bolts of how eNAM is beginning to change an inefficient legacy structure,
we conclude that this GoI initiative could dramatically overhaul the entire agri value chain. In fact, we think the Market data
Agri commodity market in India is at the same juncture where the Indian equity market was in the early 1990s,
when floor trading gave way to the electronic market place. BSE Sensex 29,737
Early winds of change are visible. Out of ~2400 mandis across India, ~400 mandis have already been integrated
with eNAM. Once integrated completely, India, with an Agri GDP size of US$ 325bn, would become the largest NSE Nifty 9,220
digital agri commodity spot exchange market in the world. We estimate that eNAM could deliver 20%-30% S
reduction in intermediation cost, leading to 10%-15% increase in farmers realization and 10%-15% reduction in 30%
prices paid by consumers. More importantly, like the hugely successful crop insurance scheme (see our note
Crop Insurance Scheme), eNAMs structural impact is in reducing the volatility in farmers income by replacing 20%
local region demand-supply vagaries with more stable pan-India demand-supply dynamics.
Why we need eNAM: India consists of various agricultural belts, viz., Maharashtra alone produces 30% of Indias total 10%
onion and Madhya Pradesh produces 27% of Indias total pulses. During harvest season, prices of agri-commodities vary
widely across markets. Current regulations and lack of infrastructure force farmers to sell their produce only in the nearby
mandi to registered traders (called as Adatias). Adatias tend to form cartels affecting price discovery for farmers and
food-processors/retailers, alike, as these mandis operate independent of price movements outside their precincts.



How eNAM changes the equation: Once implemented fully, eNAM aims to 1) Eliminate traders cartels and therefore
price manipulation at mandi-level; 2) Provide a better and real-time price discovery based on actual demand and supply
of agri-commodities that should result in lower prices for processors / retailers / consumers and would also discourage Sensex BSE 200
hoarding as information on agri-commodities holding would be readily available; 3) A better price realisation for farmers
would lead to increased focus on optimisation of agri-inputs (seeds, fertilizers, agro-chemicals, mechanization, irrigation, Performance (%)
etc.), which in turn, would result in higher farm productivity and incomes; 4) Digitize agri commodities transactions,
leading to reduction in cash transactions that would benefit both Government and the banking system alike. 1m 3m 12m
Current progress and acceptability: While there are ~2400 mandis across India, ~400 mandis in 13 states Haryana,
BSE200 4% 13% 23%
Telangana, AP, Gujarat, Rajasthan, MP, UP, Jharkhand, Chattisgarh, Himachal Pradesh, Maharashtra, Orissa, and
Uttarakhand have joined the eNAM platform. 3.6mn farmers, 78,716 traders and 36,937 agents have been registered Sensex 3% 11% 17%
with eNAM. So far, eNAM has already handled a turnover of Rs. 140bn and a total quantum of 5.4mn MT.
Key issues need to be addressed: Our mandi-level interactions suggest that GoI needs to work on 3 important aspects
to make eNAM most effective: 1) Each mandi needs to have automated assaying facility which should be completely
reliable so that traders dont have to be physically present in the mandi, 2) Traders physically not present at a specific
mandi where a farmer is delivering his produce need adequate logistical support on managing the physical transfer,
storage and transportation of their purchases, and 3) Online infrastructure (kiosks for farmers, included) and internet
speed need to be sound enough to handle peak season arrivals smoothly.
GAUTAM SINGH +91 22 6176 6804 Find Spark Research on Bloomberg (SPAK <go>), Page 2
GAURAV NAGORI, CFA +91 44 4344 0072 Thomson First Call, Reuters Knowledge and Factset
ARJUN N +91 44 4344 0081
#1. What is eNAM STRATEGY
eNAM in a nutshell

National Agriculture Market (NAM) is a pan-India online trading portal which connects the existing agri
What is eNAM mandis (APMC - agricultural produce market committee) to create a unified national market for agricultural

Fragmented nature of agri markets and deterring APMC regulations restrict farmers to sell their produce
Why we need eNAM directly to the consumers and to access pan-India agri markets. It results in higher agri commodity prices
for the consumers without benefitting the farmers.

Farmer brings his produce to mandi. After assaying and fixing a price, the bid is loaded on to eNAM
How it works platform. Buyers across the country bid and make the payment through NEFT to eNAM, which transfers it
to the farmer.

13 states Haryana, Telangana, AP, Gujarat, Rajasthan, MP, UP, Jharkhand, Chattisgarh, HP,
Current Progress Maharashtra, Odisha, and Uttarakhand have amended their APMC acts and joined eNAM platform. So far,
400 mandis have been connected to the eNAM platform (India has 2,477 regulated agri markets)

Currently 69 agricultural and horticultural commodities including fruits and vegetables have been notified
Traded commodities for trading on eNAM platform.

As per the latest data, 3.6mn farmers, 78,716 traders and 36,937 commission agents have been
Acceptability registered on the eNAM at present. Total turnover done by eNAM is Rs. 140bn in the last five months.
Total quantum traded is 5.4mn MT.

Pre-requisites for enabling a eNAM: APMCs have to make the following three changes in their existing rules to implement eNAM
The State APMC Act must have a specific provision for electronic trading
The State APMC Act must provide for issue of licences to anyone in India to trade through the NAM in the local mandis.
There must be one single licence for each State to facilitate trading in all the mandis of that State and a single point levy of transaction fee.

Page 3
To understand this, lets first understand the APMC Act, its intended objectives versus reality

Why the existing APMC model is not up to the mark

As per the APMC Act, states are geographically divided into markets (mandis). Farmers can sell their produce via an auction at the
mandi in their region to APMC agents, who require a license to operate within a mandi. The major objective of the act was to protect
the farmers from the wholesale and retail traders who were buying at a price far lower than the market price.

However, over the period, APMC agents formed local cartels, forcing farmers to sell at lower prices. Also, farmers can not move
the produce to another mandi within the state because each market requires separate license and transportation costs is too high.

Multiple charges levied within the mandis such as market fees, licensing fees and commission etc. pushed up agri commodity prices.
Thats why APMC act failed to deliver on its objectives.

Intended Objectives Reality

The agents collude and fix the auction
Perfect To facilitate optimal price discovery Cartelisation price far below the market price leading
Competition through auctioning process. to exploitation of farmers. This has led to
Scenario & Monopoly
a monopolistic market situation.

Only registered traders can buy the A monopolistic market situation has led
Prevents notified products directly from the Exploitation
Exploitation by under the veil of to wide gap between the market price
farmers thereby ring-fencing farmers and the price paid to the farmers
Corporates from big retail houses. law

High market fee for farmers and

Information from all mandis to help in Exorbitant Fees licensing fee from the commissioning
Unified Markets achieving better price discovery across morphed into agents who mediate between buyers and
markets in a state. entry barriers farmers restricts new comers.

Page 4
#3: How things would change after eNAM implementation STRATEGY
A pre and post eNAM comparison


A unified national e-market platform for notified

1. Market Structure Fragmented nature of agri markets
agricultural commodities

2. License Requirement Need for multiple licenses to trade within a state Single trading license valid across the State

Pre-condition of physical presence or possession of

3. Physical Presence shop in market yard
No need to have physical presence

4. Participants Limited number of traders due to strict licensing policy Large number of traders due to Liberal licensing policy

Better and real-time price discovery based on actual

5. Price Discovery No transparency in pricing, local traders decide price
demand and supply of agri-commodities

6. Fees Multiple level of fees, agent commission etc. Single point levy of market fee across the State

APMCs continue to exist. But farmers can sell to

7. Selling Restrictions Farmers can sell their produce only through APMCs
traders across India on eNAM

Eliminate forming of cartelization as traders dont

8. Cartelization Rampant collusion, traders usually form cartels
know each other

Lot of information asymmetry between buyers and Removes information asymmetry between buyers and
9. Information Gap sellers sellers

Lot of scope and incentive for hoarding given that no Hoarding would be curtailed as one can pinpoint who
10. Scope for Hoarding information about hoarding is hoarding

Page 5
#4: Key stakeholders and responsibilities STRATEGY
Four major stakeholders in implementing eNAM

Small Farmers
Consortium (SFAC)
SFAC is the lead agency for
implementation of eNAM. It
carries out all administrative
and management functions
with respect to

National Informatics
Centre (NIC) Strategic Partner (SP)
NIC is the technical partner Nagarjuna Fertilizers and
responsible for providing all Chemicals Limited (NFCL)
the infrastructure (virtual eNAM
has been appointed as SP for
servers, base operating a period of 5 years to develop
systems, firewall, load and maintain eNAM Portal
balancers, SMS and email
services etc)

Directorate of
Marketing and
Inspection (DMI)
Provides assistance on
scrutiny of the detailed
project reports submitted by
States. Assists Project
Appraisal Committee (PAC)
with respect to regulatory and
reforms aspects

Page 6
#5. The system design of eNAM STRATEGY
How eNAM operates

Step 4 Step 5 Step 6

Step 2 Step 3
Step 1 Buyers across India Buyers make the eNAM transfers it to
Farmer gives his The details of the
Farmer is registered bid for the product payment for the the farmer after
produce for quality product is loaded on
with eNAM. and deal is finalized selected lot through deducting a
assessment the portal
when trade matches NEFT to eNAM transaction fee

SELLER eNAM platform provided

by Nagarjuna Fertilizer

National Agriculture Market Portal

Acceptance of Price Quote
Price Quote by Seller by Buyer


Quality Certification
SELLER by Identified Labs BUYER

APMC/ Channel Clearing Bank
Partners / Seller Settlement
(Deposit Money)
C OM M I S S I ON Goods Delivery

Payments Settlement
6 period: T+0
Source: GoI, Spark Capital Research

Page 7
#6. Progress and timeline for implementation STRATEGY
Implementation on a fast track

Pan India implementation status: 400 mandis in 13 states have been Total of 585 mandis to be connected via eNAM by Mar18
connected to eNAM platform of the 2,477 regulated agri markets

Pradesh By Sep16 By Mar18
19 | 7 | 37% Trading 400
portal 250 Mandis Roll out
Uttarakhand creation Mandis in 585
5 | 0 | 0% Mandis
Haryana Apr16 By Mar17
54 | 37 | 69%

Rajasthan Uttar Pradesh

25 | 25 | 100% 66 | 66 | 100%
Source: GoI, Spark Capital Research

Jharkhand Total Online

Gujarat Madhya Pradesh Sr. No. State Active APMC %
19 | 8 | 42% APMC APMC
40 | 40 | 100% 50 | 20 | 40% 1 Rajasthan 25 25 100%
2 Telangana 44 44 100%
30 | 12 | 40% 3 Uttar Pradesh 66 66 100%
AP 4 Gujarat 40 40 100%
22 | 12 | 55%
Chattisgarh 5 Andhra Pradesh 22 12 55%
14 | 12 | 86% 6 Chhattisgarh 14 12 86%
44 | 44 | 100% 7 Haryana 54 37 69%
8 Himachal Pradesh 19 7 37%
Total APMC 9 Jharkhand 19 8 42%
10 Madhya Pradesh 50 20 40%
Online APMC
11 Maharashtra 30 12 40%
12 Uttarakhand 5 0 0%
Source: GoI, Spark Capital Research

Page 8
#7. Key benefits of eNAM for individual stakeholders STRATEGY
Efficient and transparent price discovery across the agri supply chain

Single market fee,
access to all agri
Expect 10-15%
better price
Hoarder realization Trader
eNAM would Single licence
discourage valid across state;
hoarding as
information on Access to all agri
holding would be markets with
available single license


Consumer APMCs
To pay lower Continue to exist.
prices due to
efficient and eNAM to transfer
transparent price the mandi fees to
discovery Food respective APMC.
To pay lower
prices due to
better price
discovery and
direct access to
agri markets

Page 9
#8. How eNAM would increase farmers income STRATEGY
Farmers' realization to increase by 10-15%

Once eNAM is fully operational, we believe, eNAM would deliver ~20-30% reduction in intermediation cost depending on the
agri commodity, leading to ~10-15% increase in farmers realization and 10-15% reduction in prices paid by consumers.

Post eNAM implementation

Current system
eNAM would provide a pan India platform where farmers could
Farmers sell their produce to local traders / APMC agents, who
sell their produce to buyers across the country, eliminating the
offer lower than market price because they know that farmers
monopoly of the local traders.
have no choice but to sell to them.
It would result in higher return to farmers as they get the market
Then these traders / APMC agents charge double commission
price for their produce which is higher than the price offered by
(both from seller and buyer) and sell it to wholesalers, who sell
the local traders.
it to retailers and then final consumers buy it from retailers.
We believe, eNAM would deliver ~20-30% reduction in
In this entire process, the price of the produce goes up by
intermediation cost depending on the agri commodity,
100%-150%, which increases price for consumer without
leading to ~10-15% increase in farmers realization and 10-
any benefit to farmers.
15% reduction in prices paid by consumers.

Rs.25/kg Rs.22.4/kg
Rs.20/kg Rs.17.2/kg
Retailer Consumer Retailer Consumer
Rs.12/kg 30% Rs.11.5/kg 30%
Wholesaler Wholesaler
30% Final consumer 30% Final consumer
Rs.10/kg Commissioning pays Rs. 25/kg, Commissioning pays Rs. 22/kg,
Agent ~150% jump Agent ~94% jump
Cost: 25% Cost: 15%
Rs.8/kg Rs.8/kg
Farmers 20% Farmers

Farmer Farmer
produces onion produces onion

Source: Spark Capital Research Page 10

#9. Key issues need to be addressed STRATEGY
Way forward

For eNAM to be more effective, the following issues need to be resolved:

Grading laboratories: One of the most important factors for inter-state transactions to take place is the assurance of the quality of the selected
product. Therefore, Govt needs to put quality control laboratories for assaying and grading purpose so that traders across the country can bid
based on the grading provided by the quality officers. The concept of virtual reality should also be considered to add more credibility to the
#1 system.

Warehousing, logistics and quality assurance: Traders outside the mandi bidding in e-auctions need support on managing the physical
transfer, storage and transportation of their purchases. These issues need to be resolved to make eNAM workable for the traders who are not
physically present in the mandis. There is a need for a body which handles the settlements, ensuring that the high grade product is not replaced
#2 by low grade product during the delivery process.

Lot size: A big challenge for inter-state trade is the difference between the lot size demanded by the traders and the lot size supplied by the
farmers. Traders outside the mandis usually demand for larger lots to take the benefit of the economy of scale in handling the logistics
#3 (transportation etc.), whereas farmers supply smaller lots.

Internet speed & other technical glitches: There are incidents of poor internet speed, system down during the peak season arrivals. The
online infrastructure needs to be sound enough to handle such technical glitches like crashing of servers, failure of bidding etc.

Awareness and training: To increase awareness and acceptability, the importance of eNAM has to be explained to the farmers and traders
through awareness campaigns. State govts also should promote eNAM proactively. There are 2477 regulated APMC markets in India. Even if
#5 the Govts target of connecting 585 markets is achieved, it is just 24% of the total of 2477 regulated agri markets (APMC) in India.

Smooth gate entry and registration: During peak harvest season, APMC markets receive a large number of farmers, creating a long queue at
mandis gate which in turn, creates traffic jams . Gate entry and registration process needs to be fast to avoid such issues.

Page 11
#Appendix 1: Our conversations with the stakeholders STRATEGY
Supply chain constraints that limit farmer incomes to ease

Farmer in Karnal (Haryana) APMC agents

Post eNAM, the benefit is that I get The quantity each farmer brings to
immediate payment from trader in the mandi is very small. Farmers
my bank account. Earlier would still need us for sorting and
sometimes I had to wait up to one consolidating their produce. We are
month for the payment. still very much in the in the game.

Farmer in Charkhi (Haryana)

Earlier we had no choice but to sell An official on eNAM
our produce to the local traders at Software we are building for eNAM
whatever price they gave to us. platform would be 2.5 times that of
eNAM allows us to sell to traders BSE and NSE put together. The
from all Indi. We are already seeing potential is huge in this business.
its impact on prices

Farmer in Kaithal (Haryana) An official on logistics

During harvest season, many times Every mandi will have accredited and
we had to sell our produce below authorised transporters. Half a dozen
Minimum Support Price (MSP). organised logistic companies are
eNAM has ensured that no one can walking into this space
quote a price below MSP now.

Page 12
Market outlook

Mahesh Nandurkar Govt spend not a tailwind Weak tax growth, fiscal correction impacting expenditure
+91 22 6650 5079
Govt (central + state) expenditure growth of 16% during FY17 was a key
Abhinav Sinha driver of growth. This number will be less than 10% in FY18. We analysed
+91 22 6650 5069 the budget documents of 15 states accounting for 87% of GDP and the
trend is not very different from the federal budget. The states plan to
Alok Srivastava taper expenditure growth to 10% in FY18 from 19% in FY17 as they plan
+91 22 6650 5037 to get the fiscal deficit back in shape - down 50bps YoY to 2.6%. The
focus is on rural development (roads, irrigation). Select states are
focusing on housing and Maharashtra has proposed land monetisation
/off-balance sheet funding for infrastructure spend. With increased
7 April 2017
political risk of farm loan waivers, the possibility of a reduction in
India productive development spend exists.

Market Strategy State govt expenditure growth to shrink in FY18

q The total FY18 expenditure of the 15 states for which budget documents are
available adds up to Rs25tn as against Rs21tn for the federal govt.
q During FY17, states own revenue growth was moderate at 11% but strong support
from the central govt and a higher fiscal deficit drove expenditure growth to 19%.
q In FY18, the state governments plan to reduce the fiscal deficit from 3.1% in FY17
to 2.6%. Also, total revenue growth will decelerate as the oil-led bonanza is now
behind us. Expenditure growth is expected to reduce to 10% in FY18.
q The states are already building in 15% own tax revenue growth for FY18 and most
states have already built in a compensation under GST. Revenue projections of
Maharashtra, Karnataka, Gujarat, etc appear conservative.
q We note that only about 25% of the total state govt revenues are assured 14%
revenue growth under GST.

Focus clearly visible on social housing/other social sectors

q Several large states have budgeted for housing construction. Karnataka is the most
aggressive with 0.7m units, followed by Tamil Nadu and Telangana with 0.2m.
q Rural roads is also a priority for most states. Tamil Nadu has planned a large 20%
increase in irrigation budget.
q Bihar has raised spending on rural works by 25% in FY18BE and Andhra Pradesh
(AP) has increased allocation to rural development by 27%. Madhya Pradesh and
Odisha are have hiked allocation to urban development by 34%/22% YoY.

If farm loan waivers spread

q The state of Andhra Pradesh has already provided for Rs36bn in this years budget
towards the Agriculture redemption scheme.
q With Uttar Pradesh approving a large Rs360bn (3% of state GDP, 10% of the state
govt total expenditure) farm loan waiver, pressure is building on the other states.
q Maharashtra and Tamil Nadu are reportedly considering this too. If farm loan
waivers spread, funds available for productive investments might be affected.

Other interesting points from the state budgets

q Combined with the states discom, Tamil Nadu will save Rs13bn/year due to UDAY.
q Haryana has saved Rs6bn through DBT/Aadhaar database. It weeded out ineligible
beneficiaries of kerosene subsidy, social pension and scholarships.
q Gujarat and Haryana explicitly mention implementation of pay commission awards.
Gujarat has allocated Rs55bn towards this in FY18.
q Rajasthan has completed GST registration for 80% of tax assesses in the state.
q Kerala has installed smart surveillance cameras on border roads on an experimental
basis to prepare for GST. If the camera captures goods vehicles that have not
uploaded the invoices, such vehicles can be intercepted and checked by mobile
squads of the Commercial Taxes Department for tax evasion.
q Karnataka has said that the impact of demonetisation on stamps and registration
revenues was Rs13.5bn (total collection of Rs78bn) in FY17.

Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at
For important disclosures please refer to page 6.
Govt spend not a tailwind Strategy

Govt expenditure growth to decelerate in FY18

Figure 1

Total government Trend in YoY growth in total government expenditure

expenditure growth is
30 % YoY Total centre+state combined expenditure, ex- interest % YoY
budgeted to decelerate to
9% in FY18 as both 25
Centre and states reduce 25
their fiscal deficit
16 16
15 14
10 9

FY11 FY12 FY13 FY14 FY15 FY16 FY17RE FY18BE
Source: Ministry of Finance, State budgets, RBI, CLSA; RE is revised estimates and BE is budgeted

Higher share from Centre helped in FY17

Figure 2

States revenue and expenditure in FY18 vs FY17

Rsbn FY16A FY17RE FY18BE %YoY %YoY Comments
States' total revenue 15,600 18,513 20,840 18.7 12.6 Own revenues+ contribution from central
States own revenues 8,862 9,933 11,391 12.1 14.7
States' own tax revenues 7,611 8,446 9,717 11.0 15.1 Own tax revenue growth was lower than
budgeted; FY18BE appears aggressive
States' own non-tax 1,250 1,486 1,673 18.9 12.6
Contribution from central govt 6,739 8,581 9,450 27.3 10.1 Central govt transfer was higher than
budgeted in FY17
Tax share 4,234 5,086 5,659 20.1 11.3
Grants in aid 2,505 3,495 3,791 39.5 8.5
Total expenditure 19,477 23,091 25,437 18.6 10.2 Expenditure growth to decelerate to
control fiscal deficit
Capex 3,496 4,062 4,556 16.2 12.2
FD as a % of GDP 2.7 3.1 2.6 37 bps -55 bps Fiscal deficit higher than budgeted in FY17
Source: State budget documents

States own taxes account for nearly half of their revenues

Figure 3

States get nearly half of Sources of revenues for states, FY16BE

their revenues from their
Grants from the Tax on goods
own taxes, of which more Others
centre and passengers
than half comes from the 20% 12%
value-added tax
Taxes on
State Excise
States's own States's own 12%
non-tax revenue tax revenue
9% 47% Taxes on VAT
Property and 56%
Share in central 13%

Source: RBI

7 April 2017 2

Govt spend not a tailwind Strategy

States own tax growth weaker than Centres in FY17

Figure 4

States are building in Trend in tax revenue growth of states and Centre
higher tax revenue
growth vs the Centre in Central govt gross tax revenue States own tax revenue
FY18 30

25 (% YoY)
20 18 17
17 17
15 15
15 13 12 12
10 9 9
10 8

5 3

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17RE FY18BE
Source: RBI, State budget documents, CLSA

Several states own tax revenue growth in single digits

Figure 5

States own tax revenue States own tax revenue growth for FY17RE
growth was 11% in FY17
50 46
vs 14% budgeted for the %YoY
30 24 25
25 22
20 14 15
15 10 10 10 11
8 8 9
3 3 3
All states





West Bengal
Tamil Nadu


Madhya Pradesh


Andhra Pradesh

Uttar Pradesh

Source: State budgets

as property markets remain weak

Figure 6

Property market FY17 increase in stamps and registration fees

weakness led to decline in
35 FY17RE growth in stamps and registration fees 30
stamp and registration
30 % YoY
fees in many states
3 4
5 0
(5) (1)
(10) (7) (6)

Source: State Budgets, CAG, *11MFY17 over 11MFY6 data

7 April 2017 3

Govt spend not a tailwind Strategy

But states are building in strong growth in FY18

Figure 7

States are building in own States own tax revenue growth for FY18BE
tax revenue growth of
15% YoY in FY18BE %YoY 25
19 20 20
20 17 18
15 16 16
14 14 14 15 15
15 12

Madhya Pradesh



All states




Tamil Nadu

Andhra Pradesh
West Bengal


Uttar Pradesh
Source: State budgets. Note: Uttar Pradesh numbers are based on the interim budget.

Several states above the 3% fiscal deficit level in FY17...

Figure 8

States fiscal deficit for Fiscal deficit revised estimates of states for FY17, as a per cent of GSDP
FY17RE was 50bps ahead 4.6
5.0 4.5 4.6
of budgeted estimates % of state's GDP 4.2
4.0 3.5
3.2 3.3 3.4
3.5 3.1
3.0 2.6 2.7
2.5 2.5
2.5 2.2 2.2
Andhra Pradesh

All states









Tamil Nadu

Madhya Pradesh
West Bengal

Uttar Pradesh

Source: State budgets; MP numbers include UDAY impact

which is reflected in a yield widening of states

Figure 9

State bond yields gap vs Differential between state bond and G-Sec yields
G-Sec has widened to
9.0 10-year State Govt bond yield 10-year G-Sec yield
91bps %


8.0 91bps

7.5 69bps


6.5 38bps

Dec 15 Feb 16 Jul 16 Sep 16 Nov 16 Jan 17 Feb 17
Source: Bloomberg, RBI

7 April 2017 4

Govt spend not a tailwind Strategy

but states are building in a decline in deficits in FY18

Figure 10

Some states expect to FY18 budgeted fiscal deficit, % of GSDP

breach FRBM limits in
FY18 as well % 3.4 3.4 3.5 3.5
3.5 3.0 3.1
2.9 3.0
3.0 2.8
2.6 2.6 2.6
2.5 2.3
1.8 1.8
2.0 1.5
West Bengal

All states


Uttar Pradesh





Tamil Nadu

Andhra Pradesh


Madhya Pradesh

Source: State budgets, CLSA

Capex growth decelerating

Figure 11

Capex growth is Trend in states capex growth, YoY

decelerating as states
35 Capex
look to reduce fiscal
30 increase)





FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17RE FY18BE
Source: CLSA, State budgets

7 April 2017 5

12/04/2017 Electricvehiclesandtheautoindustry

Electric vehicles and the auto


Business Standard 11 Apr 2017 AKASH PRAKASH

nal equipment manufacturers (OEMs) as EVs replace internal combustion engine (ICE) cars and they

This transition is of huge significance as globally the passenger vehicle industry has a turnover of
tion from ICE vehicles to batterypowered EVs will cause disruption on a scale not seen before. The
Lithiumion batteries will be one of the main building blocks for transportation, renewable energy
storage and backup power. These batteries will be one of the critical technologies of the next few
The country will export nearly 800,000 cars in 2017, a value of at least $4 billion, with nearly 90 per
ingtoEVs,willitundercutwhatevermanufacturingedgewehaveinthisspace?Willweremainacar 1/3
12/04/2017 Electricvehiclesandtheautoindustry

ion batteries and components? Will we become in cars, what we are today in smartphones: Cheap
of about $5,000. This gap will narrow as the costs of batteries fall by about 20 per cent annually and
to core components (batteries) and enablers of the new generation of automobiles. As the OEMs lose
EVs will be much simpler to manufacture with almost half the components of the classic internal
transmission components, or companies focused on fuel injection and exhaust systems will lose out.
in sales of EVs, driven by subsidies and forced government fleet purchases. It is going to create a na
manufacturingneitherdowehavethetechnology.IhaveheardofnoattemptbyanyIndiancompanyor 2/3
12/04/2017 Electricvehiclesandtheautoindustry

the flatpanel technology waves. We have absolutely no technology or manufacturing capacity of any
othertransition,andremainjustanimporterofcriticalenablingtechnologiesofthefuture. 3/3



their charges vital signs. They can zoom in on any patient via a camera at the foot of each bed. These here are PVCs

and where specialists, with the help of medical technicians and pricey machinery, diagnose their ills. They are also the
care. But highspeed internet, remotemonitoring technology and the crunching of vast amounts of data are about to

Plenty of other institutions are trying to grab someof the workand profitsthat will be displaced, including primary
care groups, insurers and healthmanagement organisations. And technology firms are already playing a bigger part in
health care as phones become more powerful and patients take control of their own diagnosis and treatment. But the
which medical teams would monitor patients near and far to a standard until recently only possible in an ICU. The

during the Enlightenment, ambitious institutions such as Westminster and Guys, in London, developed into complex
closed or merged; doctors specialised and clustered in big cities; and nursing was professionalised under Florence


the interminable battles in America over the future of Obamacare. Fastageing populations and the rising cost of new
ofdiseasein allbutthe poorestcountrieshasshifted.Communicable diseasesarenolongerthebigproblem; nowit is

the delivery of care, the role of the patient and what makes a good doctor. The First is what should happen where. A
runs teaching hospitals. Just as online banking made life more convenient for consumers and freed up branch staff for
half of consultations offered by Kaiser Permanente, an integrated American healthcare Trm that runs many hospitals,

including blood tests and virtual imaging, become available remotely, more patients could receive hospitalquality care


For all this to happen, primary care and home support will need to improve. Kaiser shows what such integrated care

Banner Health, a large nonprofit American health system, runs 28 hospitals and several specialised facilities across six
away. Under its intensive ambulatory care programme, patients are helped to leave hospital earlier than is usual for

For patients who must still be admitted to hospital, the experience could be much more convenient and pleasant.
kiosks for blood and urine tests and the like, and updates on patients and relatives phones. For preplanned visits an

Healthcare managers are already waking up to the fact that a patients

environment affects outcomes such as recovery times and success rates.
and classical music. The latter can all be found in Kaisers Manhattan Beach
for patients. The new Karolinska University Hospital, in Stockholm, has
SKr118m ($13.2m) worth of art and lots of glass to maximise light, both
hospital, says Annika Tibell, the medical director; instead of flashing alarms
and loudspeakers, staff will have discreet personal buzzers. Kaiser has
Some hospitals have had acoustic levels at night of over 70 decibels, the

But the biggest upgrades to hospitals are needed behind the scenes. Johns
wearing headsets orchestrate the 1,100bed institution around the clock. GE Healthcare, a medicaltechnology firm,

own homes, could be at patients bedsides virtually with a swipe of a touch screen. All this would not only make the
code, to the exit. Soon Karolinska hospital will equip every patient with a vitalsigns tracker. In the Cleveland Clinics
recently opened Avon Hospital, sensors track whether staff have washed their hands before entering a patient room:


A command centre could watch over patients not only in hospitals, but alsoat home. Wearable devices that track vital
signs, contact lenses that monitor bloodsugar levels and smartstitches that measure the pH level of fluid in wounds
warnedhim ofaworryingchangeina patientstemperature,he couldwakethepatientwithacallevenbeforehefelt

All this monitoring would bring two new risks: mass hypochondria, as patients obsessed over their data and flooded
hospitals with requests for consultations; and alarm fatigue, in both patients and medics. The antidote would be an
intelligent monitoring system combining all the different datastreams, filtering out the least relevant and alerting staff
to aberrations. For example, a pneumonia patient who does not shake off a fever after two days of antibiotics needs


ofcoursenonsense.Basictasks,suchascartinglaundryaround,arealreadybeingtaken overbyrobots.Everydaycare,

with head injuries for signs of brain trauma. Today, these are diagnosed by a doctor who pores over MRI scans. Deep

But mostly such technological advances would make doctors better, not replace them. The Cleveland Clinic is putting
Watson, IBMs robot that learns to reason as it is fed data, through medical school. It could soon join doctors on their

be steered manually with a joystick. In future robots might be able to carry out some standard procedures such as hip
replacements autonomously, with a surgeon getting things started and the robot doing the rest. With more complex
operations, a supercomputer linked to a realtime virtualreality (VR) machine could help walk surgeons through their
operations. It could, for example, highlight where a tumour sits in the liver and warn a surgeon about impinging on an
Sricharan Chalikonda, a surgeon at the Cleveland Clinic, says he can imagine scrubbing up full Robocopstyle, with a
helmetwith builtinVRgogglesgivinghimfighterpilotsupervisionandglovesthatgivehimsuperhands.Histeam
has already worked with 3D prints of patients organs; the next big leap would be to project live images, showing the
blood owing through them. Microsoft HoloLens, clever virtualreality goggles, is already being used to teach students

With quicker and less invasive treatments, recovery times would fall. Medical errors would become less frequent, as
world. I can totally see myself sitting here at my desk, guiding three operations in three different locations, says Mr

demand for health care is growing as livesand that part of them lived in poor healthgrow longer. The World Bank
estimates that by 2030 the number of healthcare workers will need to double, compared with 2013an extra 40m

take on a new role: more like copilot than passenger. Illegible charts at the end of the bedliterally out of patients

He thinks that with the right technological and medical support they would be able to spot, and respond to, raised



The next iteration of the hospital, however, is tantalisingly within reachand it is more the coordinating node in a
network than a selfcontained institution. We have reached the peak of bringing patients to the healing centresour

IndiaApril 7, 2017

Strategy Note

India India Strategy- Disruption Series III

Falling battery cost: Sinking fossil fuel demand
Given across-the-board decline in energy storage costs for batteries, the virtuous
Highlighted companies loop of solar power is complete, which is bad news for fossil fuel, especially coal.
Bharat Heavy Electricals While lithium ion (li-ion) is still the most versatile battery type, the rapid development
REDUCE, TP Rs125.0, Rs179.1 close in flow batteries could be a real game changer.
We remain concerned about BHELs medium-
term order inflow prospects, as its thermal
In contrast to li-ion batteries, flow batteries (particularly VRFB) have long cycle life
and 40-50% lower energy storage costs (UScts/kWh).
capacity utilisation is at an all-time low and it
faces slow-moving orders. The lower battery In our view, the decline in energy storage costs may lead to widespread adoption of
prices are alleviating the concerns about grid renewable energy, which would be negative for fossil fuel demand, particularly coal.
instability from rising renewable energy, which
is another negative for thermal power plants Significant decline in battery prices across the board
and BHEL. The price of batteries is falling across technologies, from li-ion to flow batteries. Li-ion
Coal India battery prices have fallen by ~70% in the past 10 years and we project that they will
REDUCE, TP Rs271.0, Rs286.4 close further decline by 20-30% in the next few years. The effective cost of flow batteries,
Coal demand is at risk from rising proportion particularly vanadium-based flow batteries, is even lower than that of li- Ion batteries, as
of renewable energy in the electricity mix. they last almost 20 years. The technological innovation in flow batteries could lead to
Improvement in battery technology would prices declining by another c.40% in the next 3-4 years, in our view.
address the issues related to grid stability from
rising contribution from solar energy and Decline in battery prices is a boon for renewable grid stability
hence, is negative for coal demand. Given the rising proportion of renewable energy in the electricity mix, concerns are being
expressed regarding grid stability. The arrival of cheaper flow batteries would solve most
Cummins India Ltd
REDUCE, TP Rs830.0, Rs959.2 close of the grid issues related to increasing proportion of renewable power, including: 1) peak
power requirements, 2) grid stability, 3) frequency management, 4) integration of solar
In our view, challenges to earnings growth are
likely to remain for the domestic powergen power into grid, and 5) management of transmission/distribution systems. We believe
segment, considering the lower power deficit these functions could be fulfilled by flow batteries at half the cost of li-ion batteries.
amid intense competition that could limit its Off-grid solar power plants are viable option with flow batteries
pricing power. Increasing viability of batteries
as an energy source is another headwind.
The rapid development in energy storage technology has the potential to render all
concerns about grid instability caused by renewable energy pass. Vanadium redox flow
batteries (VRFB) provide a cheap storage option at the cost of 5 UScts/kWh. VRFB,
combined with solar power (costs have come down to 5-6 UScts/kWh), could replace
off-grid diesel generator (DG) sets (average power cost of up to 30 UScts/kWh).
Next-generation flow batteries show marked improvement
Next-generation flow batteries have arrived on the market and interestingly, innovator
NanoFlowcell ( claims that they can be miniaturised to fit into
cars. Developments in flow battery technology, particularly VRFB, could significantly
reduce the cost of energy storage. While the older VFRB flow batteries (demonstration
power plant in California) operate at a cost of 9 UScts/kWh, the newer VRFB operate at
a lower cost of 5 UScts/kWh.
Bad news for coal, DG set and thermal plant equipment makers
The development in battery technology is negative for thermal power plant equipment
maker BHEL, coal producer CIL, as well as diesel engine maker Cummins India. The
back-up power market for DG sets will not be negatively affected, but we believe the
market for off-grid power will be completely taken over by batteries in a few years. These
headwinds, coupled with rapid battery developments, make us negative on Cummins.

Figure 1: Prices of all battery types have fallen significantly and we expect the
downtrend to continue in coming years
Flow Batteries Advanced Lead-Acid Lithium-Ion Sodium Sulphur Sodium Metal Halide
Analyst(s) 700


US$/ kwhr



Satish KUMAR 200

T (91) 22 6602 5185
Saurabh PRASAD
T (91) 22 6602 5186 0
E 2014 2017 2020
T (91) 22 6602 5174

IndiaStrategy NoteApril 7, 2017

The prices of storage batteries are falling Flow Batteries Advanced Lead-Acid
There has been continuous decline in the prices of Lithium-Ion Sodium Sulphur
Sodium Metal Halide
storage batteries in 2014-2016. Li-ion battery prices have 700
fallen by 70% in the last decade and we expect them to 600
fall further. With innovation, flow batteries could also 500

US$/ kwhr
become cheaper moving forward.




2014 2017 2020

Li-ion batteries (still the most versatile) 140

production capacity to expand by 130% in 120
35 GW by Tesla
and 15 GW by
CY18-20F Foxconn

Capacity in GW
100 20 GW by
Li-ion battery production capacity is slated to go up by BYD and
130% over the next three years, in our view. Li-ion 10 GW by
batteries are still the most versatile battery type, as it can 60
be used in a wide range of applications, from mobile 40 Capacity
addition by
phones to electric cars and solar power plants. LG chem

2015 2016 2017 2018 2019 2020 Capacity
by 2020

Flow batteries, particularly VRFB, are ideal UET Advanced Vanadium Flow
Battery 20+ years life
for big storage applications
Big storage applications require batteries with long cycle
life and the batteries used are subject to multiple cycles
of complete discharge and recharge. As indicated in the
chart on the left, li-ion batteries can fail in such

Solid Batteries (Lithium,

applications. In contrast, the new-generation VRFB can Lead Acid, Others)
last up to 20,000 cycles.

Cycles, Time

Decline in flow battery prices make them

viable for most grid energy storage needs 700
The decline in prices of batteries, particularly flow 600 369.5 343
batteries, has made it possible to use them in grid energy 500
US$/ MWhr

storage systems (ESS). VRFB storage cost is now as low

as 5 UScts/kWh.
300 137.5
200 200
173.5 160.5 177.5
100 105.5 Dotted line indicates the cost
of a gas based peaker plant
Transmission Peaker Frequency Distribution PV
System Replacement Regulation Services Integration


IndiaStrategy NoteApril 7, 2017

Rooftop solar power plants are even viable 12

for consumers, given power purchase cost

storage batteries in UScts/KWh

Rooftop power cost with li-ion
Rooftop solar power plants, even with the usage of li-ion 10

batteries, are becoming viable for behind-the meter 8

applications. We estimate the cost of power from a
rooftop solar power plant is 11 UScts/kWh or around 6
Rs7/kWh, which is close to the price paid by the
consumer for power from the national grid.

Solar power cost Battery cost Overall cost

Overall battery market size in India to Conversion Hotels Shopping Malls Grids anciliary
Transportation potential 1% 2% SEZs Services
expand to 27GW by 2020F sector 5% 4% 2% Townships
Rural Grid 8% 2%
Given the price decline, batteries are likely to become the connected Rural Micro Grid
3% 3%
energy source of choice for many off-grid applications Industrial
such as data centres, in our view. Indian battery 5% Wind Integration
Agriculture 4%
manufacturers are falling behind the innovation curve and 3%
hence, we do not recommend any significant player in Data centre and
India that is likely benefit from the recent developments. 3% Telecom towers
Military and 37%
defense Others
4% 4%
Solar Integration

Improvement in battery technology is EV/EBITDA (x) Mean Std. deviation

negative for coal and hence, CIL 14 +1 sd
-2 sd
-1 sd +2+SD2

Higher battery cost was the key impediment to wider

adoption of solar and other renewable energy
technologies. With that hurdle removed, we believe solar 10
energy will be adopted more widely, which is a key risk to
coal consumption and hence, CIL. CIL is trading close to 8
its historical mean now, but given the earnings risk, we
believe it faces valuation downside.
















Development in batteries is negative for DG 45

PE Average PE +1 STD
set makers like Cummins India 40
-1 STD +2 STD -2 STD
The bulk of Cummins Indias business comes from the 35

back-up power segment, which we do not expect to be 30

negatively affected by the new batteries. However, its off- 25

grid power business will face significant growth
challenges. Furthermore, the stocks current high
valuation does not leave any room for negative surprises.
Hence, Cummins India remains a Reduce for us.

















IndiaStrategy NoteMarch 19, 2017

Falling battery cost: Sinking

fossil fuel demand
Battery industry: Big changes in the offing
Ongoing developments in battery storage technology have the potential to
negate the concerns about grid stability due to rising proportion of renewable
energy in the energy mix. Developments in flow battery technology could
significantly reduce the energy storage costs for renewable power plants. It
would also diminish the prevalent usage of li-ion batteries in electric cars, as
well as for mass storage functions. We believe the off-grid fossil fuel-based
power generators will become obsolete in the next few years.
Rapid development in battery technology
We are witnessing rapid development in battery innovation and cost reduction.
Batteries are becoming more durable, less costly and more user friendly. In
many cases, these developments could make traditional power storage sources
redundant. The falling cost of batteries is good news for the penetration of
rooftop solar power plants in India, where net metering has not started yet.
Four categories of batteries
Batteries can be broadly classified into four categories, as follows:
1. Flow batteries;
2. Lead-acid batteries;
3. Lithium-ion (li-ion) batteries; and
4. Sodium-sulphur batteries.
Each type of battery has its own advantages and disadvantages. Most
importantly, not all batteries are meant to be used for all purposes. Figure 3
illustrates the intended uses of different energy storage devices and their
intended operation ranges (in MW).

Figure 3: Flow batteries are ideal for medium-capacity energy storage


IndiaStrategy NoteMarch 19, 2017

Flow batteries witnessing rapid advancement in technology

Flow batteries essentially work under the principal that the mixing of two
different electrolytes will result in electron flow and hence, flow of electric
current in the circuit. Flow batteries have an intrinsic advantage over solid-state
batteries, which is their long durability. Flow batteries were initially used in
stationary applications but given the recent advancements in technology
(, they are now being tested for use in motor

Multiple types of flow batteries

Various types of flow cells (batteries) have been developed, including reduction
and oxidation (redox), hybrid and membrane-less. The fundamental difference
between conventional batteries and flow batteries is how the energy is stored.
Energy is stored in the form of electrode material in conventional batteries but
as electrolytes in flow batteries.

Redox batteries most suitable for regular and industrial

The redox cell is a reversible cell in which electrochemical components are
dissolved in an electrolyte. Redox flow batteries are rechargeable as they
employ heterogeneous electron transfer, rather than solid-state diffusion
or intercalation. Flow batteries are known as fuel cells.

Various types of redox batteries

Redox batteries come in the following varieties:
Zinc-bromine batteries;
Vanadium-based batteries; and
Iron-chromium flow batteries

Zinc-bromine is the established technology but its cost is still high

at 20 UScts/kWh
Zinc-bromine is the established flow battery technology. Redflow Energy
Storage Solutions ( is the pioneer in this technology. The
unique features of its batteries are listed below:
1. 10kWh battery said to deliver aggregate of 40,000kWh energy over its
2. The cost of this unit is around ~US$8,000-8,800, which translates into
3. The power cost is too high for solar application but is feasible for back-up
power and other applications that DG sets are currently being used by end-
consumers for.

VRFB appears to have the highest potential, given its low cost of 5
UScts/kWh now
Vanadium redox flow batteries (VRFB) have long shelf lives and remain
charged for a long period of time. Because of their long cycle life, the cost of
electricity production by VRFB can be much lower than that of zinc-bromine

IndiaStrategy NoteMarch 19, 2017

Figure 4: Flow batteries have intrinsic advantage over solid-state batteries (long
durability) and the latest batteries do not degrade even after 20 years
UET Advanced Vanadium Flow
Battery 20+ years life

Solid Batteries (Lithium, Lead
Acid, Others)

Cycles, Time

The following features of VRFB make them highly suitable for back-up
power/telco tower usage:
1. VRFB are fully containerised, non-flammable, compact, reusable over semi-
infinite cycles, discharge 100% of the stored energy and do not degrade for
more than 20 years.
2. Most batteries use two chemicals that change valence (charge or redox
state) in response to electron flow, which converts chemical energy to
electrical energy, and vice versa. VRFB batteries use multiple valence
states purely in vanadium to store and release charges.
3. This type of battery offers almost unlimited energy capacity, as capacity can
be increased by simply using larger electrolyte storage tanks. VRFB can be
left completely discharged for long periods with no ill effects, making
maintenance simpler than for other batteries. Given these unique
properties, the new VRFB reduces the cost of storage to about 5

Figure 5: VRFB can last for 20 years and lower the overall cost of power production
to 5 UScts/kWh

Catholy Ion- Selective Anolyte

Electrolyte Tank
te V4+ Membrane V2+ N3+ Electrolyte Tank




Li-ion batteries are the most versatile

Li-ion batteries can be used in a wider variety of applications than other
batteries. Li-ion battery uses range from cars to mobile towers and solar power
plants. While the cycle life of li-ion batteries is lower than that of flow batteries,
li-ion batteries do not cease to function after end of life (EOL) and they can still
be used, albeit at reduced capacity.

IndiaStrategy NoteMarch 19, 2017

Global li-ion battery production capacity to see exponential growth

in coming years

Figure 6: Global li-ion battery production capacity to increase by 80GW or 130%

over next 3 years, based on our estimates

35 GW by Tesla
and 15 GW by
120 Foxconn


Caapcity in GW
20 GW by BYD
and 10 GW by
addition by
Boston Power
LG chem



2015 2016 2017 2018 2019 2020 Capacity by
2020 end

Overall li-ion battery demand to increase by 15.2% CAGR in 2015-

We project that demand for li-ion batteries will continue to be lower than
capacity until 2020F. Hence, we rule out the possibility of li-ion battery price
rising due to demand-supply mismatch in the near future.

Figure 7: Overall li-Ion battery demand to increase by 15.2% CAGR in 2015-2020F

but grid storage likely to see fastest increase of 38% CAGR
Consumer Electronics Auto Grid


Demand in GW





2011 2015 2020e

Li-ion battery capacity is increasing but new battery storage

technologies are emerging
On the one hand, we observe an increase in li-ion battery capacity but on the
other, rival technologies are making serious progress, as follows:
1. The new VRFB battery technology poses serious competition to the li-ion
battery makers. The providers of VRFB technology claim that these
batteries can last up to 20 years, with peak power, which translates into
electricity storage cost of 5 UScts/kWh.
2. The cost of zinc-bromine batteries is also coming down. While it is not a
major competitor at present, the falling prices and high cycle life of zinc-
bromine batteries could make it a threat to li-ion batteries in the future.

IndiaStrategy NoteMarch 19, 2017

Energy storage cost is the key criterion in battery selection

The cost of batteries depends on three factors:
1. Capital cost;
2. Cycle life of batteries, i.e. how many charge and discharge cycles it can
withstand; and
3. Usability after EOL. For example, lead-acid batteries are likely to be of no
use after EOL but li-ion batteries can still have significant use.

Capital cost is coming down for all batteries but steepest decline is
for lithium-ion batteries
Figure 8: There has been a steep drop in storage battery prices Figure 9: Li-ion battery prices have come down by almost 70%
in last 6 years
Flow Batteries Advanced Lead-Acid Lithium-Ion Lithium-Ion Battery Pack Prices
800 1200 Title:
Sodium Sulphur Sodium Metal Halide
1000 Please fill in the values above to have them entered in your repo
US$/ Kwhr

US$/ Kwhr

400 600


0 0
2014 2017 2020 2010 2011 2012 2013 2014 2015 2016
SOURCES: CIMB, SOURCES: CIMB, Bloomberg New Energy Finance

Critical point of differentiation between batteries is cycle life

The cycle life of various battery types is entirely different. The warrantied
expected operational life (EOL) is defined for all batteries, even li-ion ones, but
the batteries do not cease to function after reaching EOL. Li-ion batteries
typically have significant life left after reaching EOL. However, lead-acid and
zinc-bromine batteries generally have miniscule life left after EOL.

Figure 10: Battery life of li-ion batteries in test conditions Figure 11: Cycle life of most of flow batteries (VRFB and zinc-
extend well beyond 6,000 cycles bromine) is much higher than that of li-ion batteries

100% 25,000 Title:

Cycle life in number of cycles

20,000 Please fill in the values above to have them entered in your repo
Residual capacity




End of Life criterion 5,000


65% 0
0 2000 4000 6000 Vanadium Zinc Bromide Lithium Ion Lead acid
Number of cycles

IndiaStrategy NoteMarch 19, 2017

New developments in VRFB to make them more attractive than

other technologies
There have been tremendous developments in VRFB storage technology.
VRFB have significant advantages over other flow batteries, such as:
1. Theoretically infinite cycle life, as VRFB only use one electrolyte and hence,
there is no risk of contamination;
2. No decline in residual capacity after multiple cycles of charge and
discharge, as there is no electrolyte contamination;
3. VRFB can last more than 20 years; and
4. The average cost of storage is as low as 5 UScts/kWh.

Renewable energy storage, vehicles and off-grid

applications: Flow batteries are new kings
Historically, li-ion batteries were the only storage technology available for
renewable energy applications. However, li-ion batteries are set to be replaced
by flow batteries, given the new developments in storage technologies.

Flow battery technology has improved significantly

There have been significant improvements in flow battery technology. Flow
batteries have come a long way from zinc-bromine to VRFB and now,
nanoFlowcell batteries.
1. Zinc-bromine batteries These batteries can last more than 10 years and
store ~40,000kWh of electricity over their lifetime. At capital cost of
~US$800/kWh, we estimate the average cost of energy storage over the
lifetime of the zinc-bromine batteries is 20 UScts/kWh.
2. Vanadium redox flow batteries (VRFB) While other flow batteries use
two different electrolytes to produce electricity, VRFB use only vanadium.
VRFB does not face the risk of contamination, which is the main cause of
failure for many flow batteries. In theory, VRFB have infinite life span but in
practice, they have average life span of 20 years. The energy storage cost
for CRFB is as low as 5 UScts/kWh.
3. NanoFlowcell technology All flow batteries are safer than li-ion batteries
but they are also bigger in size. NanoFlowcell batteries appear to have
overcome this hurdle. NanoFlowcell IP AG (
claims to have miniaturised the flow cell to a size that can fit into a car. The
company claims that the battery can store 300kWh and power a motor
vehicle for more than 1,000km (top speed of 300km/hour).
Figure 12: Flow batteries outperform li-ion batteries in terms of cycle life and cost
of storage (data on nanoFlowcell is not available yet)


Li- Ion
Cost of storage in UScts/ kWh




Zinc Bromide Vanadium


0 5000 10000 15000 20000 25000
Cycle life in number of cycles

IndiaStrategy NoteMarch 19, 2017

VRFB flow cells present serious challenge to viability of DG

set power generation
VRFB challenges the viability of DG set power generation. Globally, many
companies like UniEnergy Technologies are installing the vanadium-based
power storage devices. VRFB, used in conjunction with solar power plants,
present a viable alternative to DG sets for many applications like: 1) off-grid
telco power usage, 2) mini power grids in remote areas.
Globally there is a significant market for off-grid telco power usage
that flow batteries can cater to
In our view, the off-grid telco power markets could change in two ways, with:
1) the installation of new VRFB/flow batteries in new towers, and/or 2) the
conversion of older towers to hybrid or green solutions.
Flow batteries with solar plants will be much cheaper for off-grid
telco applications than DG sets
Capital expenditure for DG sets is low at ~US$ 100,000 for 1MW but
operational expenditure is very high. Hence, we estimate the overall cost
(including depreciation) of DG sets is 30 UScts/kWh. In comparison, we
estimate that the cost of new technology flow batteries, used with solar power
plants, is as low as 11 UScts/kWh.

This puts the significant DG markets in India and Africa at risk

Figure 13: The significant off-grid telco power market could be Figure 14: High likelihood of off-grid telco tower conversion
captured by battery-based renewable energy power from fossil fuel-based to renewable energy, in our view
West Africa SEA East Africa India RoW West Africa SEA East Africa India RoW
60,000 Title:
2019 Source:

50,000 Please fill in the values above to have them entered in your repo
Requirement in MWs





- 1,000 2,000 3,000 4,000 5,000 6,000
2014 2015 2016 2017 2018 2019 Capacity in MWs

Flow batteries also present challenge to li-ion electric car

In the recent past, Tesla ruled the electric car market. However, new
technologies are emerging fast and present a serious challenge to Tesla. The
heart of the electric car is its li-ion battery. Li-ion batteries have many
disadvantages, including: 1) overheating, 2) operating at high voltage, 3) risk of
fire, and 4) low cycle life. In contrast, NanoFlowcell claims that the cycle life of
its batteries is 10x that of li-ion batteries, poses no risk of fire and operates at
low voltage (safer for driver and passengers).

IndiaStrategy NoteMarch 19, 2017

Grid issues related to renewable energy: Lower

battery cost is the answer
The national power grid-balancing issues related to rising renewable energy
(including solar power plants) are often discussed of late. The argument against
renewable energy is that the grid-balancing cost for solar power plants is too
high, making them uneconomical as a source of electricity for the grid. Batteries
provide an easy solution to the grid-balancing issues. Given the decline in
energy storage cost, batteries are the low-priced answer to meeting grid
requirements. Batteries are now a viable solution.

Many types of energy storage systems

Energy storage systems (ESS) vary in load-handling capacity. On one hand,
there are old flywheels that are used to pump water into hydroelectric plants
and on the other hand, there are batteries that are used for energy storage.

Advantages of the energy storage system

Optimises power generation: Powergen companies could use energy
storage facilities to enhance the market value of its power generation by
shifting off-peak generation to more lucrative peak periods. Distribution
licensees could use the storage facility to adjust generation output
according to the load curve in order to effectively meet the electricity
requirements of consumers.
Controls intermittent generation from renewable energy sources: An
energy storage facility could also be used to store generation output from
renewable sources of energy, which are intermittent in nature, to deliver
electricity to buyers over a longer period.
Reliable operation of power system: Another possible use for an energy
storage facility is to store generation output in order to maintain the flow of
power over tie-lines (transmission lines that connect one area of the power
system to another area). The regulation of power flow through tie-lines is
important as it is critical to ease congestion in the transmission system and
for reliable operation of the transmission system.
Minimise deviation from schedule dispatch or drawl: Any deviation from
schedule incurs huge penalties, particularly any deviation that is detrimental
to national power grid operations. In order to reduce deviations from
schedule, the powergen companies or distribution licensees could use
storage facilities to ensure effective and well-controlled power exchange with
the grid.

Batteries or other energy storage devices needed for grids

with high proportion of renewable power
Today, to meet peak demand, high-cost power generation is dispatched.
The ESS could be deployed to solve the problem of peak demand by shifting
delivery of economical power generation during quieter periods to peak
ESS could improve the reliability of the power system by ensuring that the
frequency stays at 50Hz.
ESS could improve the efficiency of the power system through the storage of
excess power generation (above the required generation for 50Hz
frequency) and reduce greenhouse gas emissions caused by wasteful
generation of excess capacity.
ESS could reduce the need for major augmentation to the new transmission
grid. In addition, distributed storage could reduce line congestion and line
loss by moving electricity generated at off-peak periods to peak periods and
reduce the need for overall generation during peak periods. By reducing
peak loading (and overloading) of transmission lines, ESS can extend the
useful life of existing infrastructure;

IndiaStrategy NoteMarch 19, 2017

ESS could play an important role in a black start (process of restoring an

electric power station or a part of an electric grid to operation without relying
on the external transmission network), ensuring the emergency
preparedness and robust operations of the power system.

As a source of energy, batteries can perform all the functions

of an electricity grid stabiliser
Figure 15: The chart below shows the range of costs at which flow batteries can
perform the grid stabilisation functions.

US$/ MWh



160.5 177.5
100 Dotted line indicates the cost
105.5 of a gas based peaker plant
Transmission Peaker Frequency Distribution PV Integration
System Replacement Regulation Services


Off-grid solar power plants and rooftop solar plants

to become reality with energy storage devices
Thanks to energy storage devices, off-grid solar power plants are likely to
become reality in the near future. The power generated by these plants now
costs much less than DG set-based power. Even rooftop solar power plants are
becoming viable.

Off-grid DG sets likely to become redundant

Based on our estimates, the cost of power from off-grid DG set-based plants is
around 30 UScts/kWh. However, we calculate that the cost of power from solar
power plants with flow battery storage systems is as low as 11 UScts/kWh.
Such off-grid solar power plants could easily replace DG sets moving forward.

Power from DG sets costs ~30 UScts/kWh.

IndiaStrategy NoteMarch 19, 2017

Figure 16: Assuming electricity generated per litre of diesel is 3.5kW and plant life
of 10 years, we estimate the overall cost of power from DG sets is close to 30

DG set based power cost in US/ Kwhr






Equipment cost Fuel cost R&M cost Total

Cost of power from even best-in-class solar power plants with

battery storage will be much cheaper than power from DG sets
Both li-ion and flow batteries are viable to power off-grid solar cells. We believe
that flow batteries are more viable than li-ion because they can be fully
discharged, which makes them better suited for off-grid applications.

Figure 17: VRFB are ideal for off-grid applications, as they have long cycle life even
at high discharge rates
VRFB Lithium Deep Cycle Lead Acid GEL Lead Acid


Cycle life




0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% Discharge

IndiaStrategy NoteMarch 19, 2017

Figure 18: For off-grid applications with discharge rate of Figure 19: Despite higher capex, VRFB batteries can handle
higher than 75%, the lower cycle life of li-ion batteries will deep discharge and have long cycle life. Hence, they
translate into higher costs work out to be cheaper than li-ion batteries
16 12
off grid power cost with Li-Ion storage


off grid power cost with li-ion storage


batteries in UScts/Kwhr
batteries in US/Kwhr


8 6


0 0
Solar power cost Battery cost Overall cost Solar power cost Battery cost Overall cost


Given the falling cost of batteries, rooftop solar power plants

with battery storage is becoming viable
Rooftop solar cells with energy storage capacity do not go through severe
charge and discharge cycles. Hence, li-ion batteries are a feasible option for a
rooftop solar power plant. In a rooftop power plant application, li-Ion batteries
can last for 5,000-6,000 cycles. We estimate that the overall cost for such a set
up (including battery storage cost) is around 11 UScts/kWh. This is much lower
than grid power cost.

Impact on markets: Battery market to expand and DG

set makers to lose
We estimate that over the next four years, India battery market will be around
27GW by 2020F. However, if the technological changes progress at current
pace, the India battery market in 2020F could be much larger than our estimate.
In our view, DG set makers in India are bound to lose in the medium term.
Unfortunately, Indian companies are behind the global technological innovation
curve and hence, they are unlikely to benefit from the developments in battery

IndiaStrategy NoteMarch 19, 2017

Indian battery market: 27GW opportunity over 2017-2020F

Figure 20: Indian battery market present 27 GW opportunity over 2017-2020. The
market can be higher if technology adoption is faster
Conversion Hotels Shopping Malls Grids anciliary
potential 1% 2% Services
5% SEZs
4% 2%
Transportation Townships
sector 2%
Rural Grid
8% Rural Micro Grid
3% 3%
Industrial Hospitals
5% 2%
Data centre and Wind Integration
Cloud 4%
Military and defense Telecom towers
4% 37%

Solar Integration

Indian DG set makers likely at losing end

DG set makers essentially cater to three markets: 1) back-up power, 2) off-grid
diesel-based power plants, and 3) construction. We do not think that the back-
up power and construction markets will be negatively affected by the progress
in battery technology. However, we believe that the DG set makers off-grid
power market is at serious risk.

Over the past few years, telecom companies were the biggest users of DG sets
(although the cost of power generated by these sets is high at Rs20/unit).
However, the changing power supply scenario and developments in battery
technology put this market at risk.

Cummins India share price is too high and the emerging headwinds
are likely to cause further de-rating, in our view

Figure 21: Cummins Indias off-grid power business will face significant growth
challenges and its current high valuation does not leave any room for
negative surprises. Hence, we keep our Reduce call on the stock

















PE Average PE +1 STD -1 STD


The world of shared office spaces offers
convenience and cost benefits
Shared working spaces help firms cut corners on expenses as well as build sustainable networks

By Varsha Meghani

Published: Apr 11, 2017

Classified ads portal OLX has a four-member sales team operating out of Mumbais business district of
Lower Parel. The company pays a rent of Rs 48,000 to Rs 50,000 per month for the work space, averaging
about Rs 12,000 per person. For the premium piece of real estate that Lower Parel is, OLX would typically
have had to pay anywhere between Rs 12,000 to Rs 18,000 per month for one workstation (of
approximately 100 square feet) plus a security deposit equivalent to six to 12 months rent. The expenses
would have further shot up in conventional leasing as landlords dont offer floor plates less than 1,000 to
1,200 square feet, no matter how small the team. So, how has OLX gotten off this easy? Because it is
merely one of the many companies that shares Awfis, a two-storied co-working space that allows offices to
enjoy a top location, and a range of amenities without having to pay through their noses.

Welcome to the world of shared office spaces in which a co-working company takes lease of a larger space,
re-designs it and then rents out smaller plates and single desks to members, as tenants are called. Says
Ramesh Nair, CEO and country head for property consultancy Jones Lang LaSalle (JLL) in India,
Companies can save as much as 15 to 20 percent by working in a co-working space.

But its not just the cost benefits that make co-working an attractive proposition. Theres the convenience
factor, where members neednt worry about fitting out the workplace, buying furniture or getting an
internet connection, as they would under a traditional lease. Desk space can easily be reserved through an
app, giving members all the perks of a top-class office facility, including Wi-Fi connectivity, conference
rooms, storage units, informal lounges and pantry facilities, as well as not-so-traditional offerings like beer
on tap, discounts on Microsoft Office products and even yoga classes.
The concept of shared office spaces is not new. Established players, like the London-listed Regus, which
provides fully serviced office spaces and posted revenues of about $1.3 billion in the half year ended June
2016, have been in the business for almost three decades now. So what do they do that is different from co-

A key point of difference is that most co-working spaces appoint culture managers or hosts within each
space whose job is to create opportunities for collaborationboth formal, like talks by renowned speakers
and informal, like happy-hour Thursdays. It is through such active efforts that members are able to build
sustainable networks with one another. Ole Ruch, WeWorks managing director for the Asia Pacific region,
points out that because of their focus on creating a community, around 70 percent of their members
collaborate, while 50 percent actually end up doing business with each other.

Thats the real identity of a co-working space, feels Adam Neumann, the Israel-born co-founder of global
co-working giant WeWork. Despite the multiple hats it wears (of a real estate, tech and services firm), a co-
working venture, says Neumann, is actually a community company. For instance, WeWorks 90,000-
strong member network, spread across 158 workplaces in 15 countries, is encouraged to share ideas and
draw on each others strengths.

Last valued at $16 billion, WeWork tied up with Bengaluru-based property developer Jitendra Virwanis
Embassy group last February. Their first India centre is set to open in an Embassy-owned building in
Bengalurus prime Residency Road area, in the second quarter of this year. At 1.4 lakh square feet, the
space is expected to house 1,800 members. A second centre in Mumbais business district Bandra Kurla
Complex is to follow.

Typically, WeWork accommodates around 2,000 members in one space, so, say, your business needs a
graphic designer. The chances of you finding one from that pool are very high, says Karan, Virwanis son
and the driving force behind WeWorks foray into India.

The 25-year-old Karan Virwani spent two years understanding his fathers core real estate business, when
it struck him that the office space market dynamics were fast changing, as were the needs of tenants. No
one was providing space to meet the increasing demands of smaller companies. Everyone was offering
large floor plates (upwards of 5,000 sq ft), he says. Fuelling this demand is the rise of the gig economy,
characterised by freelance or contractual work, as well as the surge in startups.

Like Virwani, Sidharth Menda, a third-generation scion of the Bengaluru-based realtors RMZ Corp, set up
CoWrks last September to plug this gap. His logic: The nature of work has changed and so must
workplaces. While baby boomers valued privacy, Millennials value networks. Driven by a culture of
sharing on social media, they value meaningful connections with others, says Menda. As a real estate
player first, and now a co-working operator, the 27-year-old says he is able to draw on not just a solid
understanding of the real estate market, but also years of insights into workplace designs that enable
people to function most productively. CoWrks currently has two fully operational centres in Bengaluru,
and two more in the pipeline in Mumbai and Delhi-NCR respectively.

Like Menda and Virwani, a number of startups too have sniffed opportunity, so much so that there are
over a 100 co-working space providers in India today, according to JLL. While these spaces comprise a
fraction of the countrys total commercial real estate market, theyre fast growing in popularity. According
to Amit Ramani, founder and CEO of Awfis, a prominent player on the scene, of the total 500 million sq ft
of commercial Grade A and Grade B space in India, co-working and business centres comprise 0.4 to 0.5
percent. Over the next three years, he expects this to grow to about 2 percent.

However, Harsh Lambah, the country manager for Regus in India, believes that co-working has suddenly
become a buzzword.

Weve been at the forefront of the co-working and flexible working industry for the last 25 years. Its just
that over the last six to eight months co-working has become a big buzz. But were happy. It will grow the
category and there will be focus on who the big industry players are, he says.

Meanwhile, proponents of the co-working craze believe that this is a mega-trend, as Anand Lunia,
founder of early stage venture fund India Quotient, puts it. For startups in need of flexibility, the long
leases and large floor plates offered by traditional landlords are impractical. Startups or SMEs dont think
in square feet. They think in terms of desks. If they have five people, they need five desks. If they grow or
shrink their business, we can easily adapt to their requirements, says Ramani, who boasts of hosting over
220 companies in 20 Awfis centres spread across seven cities.

Larger companies looking for temporary space also see merit in co-working spaces. As do an increasing
number of multi-national companies like consulting firm Accenture, that Awfis counts as a client, or the
Boston Consulting Group, that works out of a CoWrks facility in Bengaluru. The desire to adopt a startup-
like culture and thereby foster innovation is a key driver, points out Nair.

The concept of co-working might have caught on, but its business model is inherently risky. While a co-
working company commits itself to a long-term lease with a landlord, of typically seven to eight years, its
members only commit to monthly contracts. You cant have fluctuating revenue at one end and fixed
rental at the other. Its not a sustainable model, says India Quotients Lunia.

Globally, WeWork has thus far taken this risk because when the times are good and demand is high, the
margins can be as high as a reported 45 percent.

Neumann claims business is good in bad times too as thats when laid off employees are looking for
alternate spaces to work out of. In fact, WeWork was set up in 2010, when the global economy was still
reeling from the after-effects of the US housing market crash in 2008 and the financial downturn that
followed. That wasnt the case with Regus though, which filed for Chapter 11 bankruptcy protection for its
US business in 2003 after the dotcom bubble burst. (The business has since recovered.)

In India, however, WeWork has struck an unusual deal. Virwani will lease out the office spacefrom
Embassy as well as other developersand invest in re-designing it, while WeWork will lend its brand,
ethos and expertise for a fixed management fee and a share of the profits. The upside of such a model is
lower, but so is the risk.

They [Embassy] come with incredible in-market experience, which is amazing to have as we enter a new
market, says Ruch of WeWork Asia Pacific. On Virwanis part, he says that even though capex is the
biggest spend for them, the Embassy groups deep understanding of the Indian real estate market and
their relationship with landlords will enable them to get the best deals.

CoWrks, aside from leveraging its own properties to build its co-working spaces, has also entered into
revenue sharing deals with third party landlords to mitigate the risks of the business. Awfis, too, has a
managed aggregation model wherein some properties are plain vanilla leases while others are revenue
share deals. Diversifying the client base is yet another way to offset risk. According to Menda, CoWrks
typically limits its exposure to startups whose churn tends to be higher. Instead, SMEs and MNCs together
account for about 80 percent of their members while early-stage startups comprise 10 to 15 percent. The
rest are freelancers.

Does co-working signal the end of the conventional office? Not just yet. While JLLs Nair is very bullish
about the co-working market, he points out that it is still very nascent. Landlords will take a while to warm
up to revenue sharing deals, he says, and until that happens its difficult for a standalone startupwithout
the financial muscle and wherewithal that real estate players like Virwani and Menda haveto survive.
Consolidation will occur and the industry will see four or five players emerge, says Nair. Eventually, only
the big boys will remain.