EQUITY RESEARCH INDUSTRY UPDATE

www.chiefsforum.tk
December 7, 2010

INDIA

India Rising—Dawn of a New Era for the Asian Juggernaut
2011—A Great Time to Visit India
SUMMARY

We see India as an attractive investment destination due to 1) relatively strong GDP and earnings growth vs.other economies–emerging as well as developed, 2) a politically stable environment at least over the next 4 years with a near-majority government in place, 3) a stable financial system, 4) acceleration in pace of reforms with an untethered government at the helm, 5) solid long-term growth potential given a higher mix of domestic demand vs. other emerging economies, and 6)favorable demographics with India's burgeoning young populace one of the most compelling growth drivers.
KEY POINTS s

Domestic demand accentuates India's attractiveness vs. other emerging markets: Around 85% of India's aggregate economic demand is domestically driven. India's large investment program and the demographic dividend of a growing, young and educated middle class are likely to continue to drive strong domestic demand for the long term. Favorable demographics make the India growth story resilient and insulated: India's young populace represents one of this market's most compelling total growth drivers over the coming years. A well-managed young-population economy leads to high visibility of nominal and real earnings growth. Also, for such an economy, the acceleration stage in the purchase of financial assets lies ahead. Market tailwind from underowned equities and wealth creation: India's transition to an increasingly market-based economy, associated with lower taxation, increased transparency and growing economic integration with the rest of the world, has sown the seeds for an key transition in the way Indian households channel their savings. We foresee a continuation of the shift in savings behavior from cash/gold to higher equity ownership through participation in the secondary markets. May 2009 elections—a seminal event: While the elections seem like eons ago, we believe them to be a seminal event in India's history and most encouraging for sustainable long-term economic growth. While the jury is still out on whether or not the current Congress-led UPA government with a majority seat count has really been able to break the shackles, some of the key areas of improvement have been divesting government assets, stabilizing capital inflows, and resolving infrastructure bottlenecks.

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Manish Hemrajani 212 667-5407
Manish.Hemrajani@opco.com

Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures and Certifications" section at the end of this report for important disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable.
Oppenheimer & Co Inc. 300 Madison Avenue New York, NY 10017 Tel: 800-221-5588 Fax: 212-667-8229

INDIA

India Rising—Dawn of a New Era for the Asian Juggernaut

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INDIA

Contents
2011—A GREAT TIME TO VISIT INDIA ................................................................ 3 INVESTMENT RISKS........................................................................................... 4 STRONGER ABILITY TO WITHSTAND SHOCKS AND DOWN-CYCLES ____________ 5 ECONOMY—INDIA AT A GLANCE ___________________________________ 6 EARNINGS GROWTH ACCELERATING THROUGH FY12 _____________________ 7 DOMESTIC DEMAND A POSITIVE FOR INDIA VS. OTHER EMERGING MARKETS ____ 8 FAVORABLE DEMOGRAPHICS MAKE THE INDIA GROWTH STORY RESILIENT _____ 9 MARKET TAILWIND FROM UNDEROWNED EQUITIES AND WEALTH CREATION___ 10 LIMITED INVESTMENT OPTIONS FOR OVERSEAS INVESTORS ________________ 11 2009 GENERAL ELECTIONS—A SEMINAL EVENT ________________________ 12 OVERVIEW __________________________________________________ 14 GROSS DOMESTIC PRODUCT ______________________________________ 16 FOREIGN EXCHANGE RESERVES ___________________________________ 22 FOREIGN INVESTMENT __________________________________________ 23 FII INFLOWS _________________________________________________ 25 IIP HAS REBOUNDED NICELY; RECENT WEAKNESS, HOWEVER, A CONCERN ____ 29 INDIA’S RISING MIDDLE CLASS ____________________________________ 30 WALLET-SHARE SHIFT FROM BASIC NECESSITIES TO DISCRETIONARY ITEMS _____ 31 STOCK EXCHANGES ____________________________________________ 32 BFSI SECTOR (BANKING, FINANCIAL SERVICES, INSURANCE) _______________ 34 INSURANCE SECTOR ____________________________________________ 39 IT/BPO SERVICES _____________________________________________ 47 PHARMACEUTICAL SECTOR _______________________________________ 53 EDUCATION SECTOR____________________________________________ 57 RETAIL SECTOR _______________________________________________ 61 MEDIA SECTOR _______________________________________________ 64 AUTO SECTOR ________________________________________________ 66 INFRASTRUCTURE SECTOR ________________________________________ 69 TRAVEL SECTOR _______________________________________________ 72

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INDIA

Executive Summary—India Strategy
2011—A Great Time to Visit India
We see India as an attractive investment destination due to 1) relatively strong GDP and earnings growth vs. other economies—emerging as well as developed, 2) a politically stable environment at least over the next 4 years with a near-majority government in place, 3) a stable financial system, 4) acceleration in the pace of reforms with an untethered government at the helm, 5) solid long-term growth potential given a higher mix of domestic demand vs. other emerging economies, and 6) favorable age demographics with India's burgeoning young populace one of the most compelling growth drivers.

Near Term Acceleration in Earnings Growth
India’s growth remains highly geared to capital flows. A stable government at the helm with a strong mandate has resulted in an improved outlook for capital flows. Even without the impetus of significant reforms, we have seen a recovery in growth over the last 12 months, and that recovery has gained further momentum over the last 6 months.

Domestic Demand Accentuates India’s Attractiveness Vs. Other Emerging Markets
Around 85% of India’s aggregate economic demand is domestically driven. India’s large investment program and the demographic dividend of a growing, young and educated middle class are likely to continue to drive strong domestic demand for the longer term.

Favorable Demographics Make the India Growth Story Resilient and Insulated
India’s young populace represents one of the Indian market’s most compelling total return drivers over the coming years. In our view, a well-run, young economy is one where the visibility of nominal and real earnings growth remains high. Also, for such an economy, the fruits lie ahead in the acceleration stage in the acquisition of financial assets, similar to what the United States experienced in the early 1990s and Korea in the 1980s.

Market Tailwind from Underowned Equities and Wealth Creation
Traditionally, Indian households have been hoarders of cash and gold. Over the past several years, however, India’s transition to an increasingly market-based economic system associated with lower taxation, increased transparency and growing economic and informational integration with the rest of the world, has sown the seeds for an important transition in the manner in which Indian households channel their hard-earned savings. Going forward, we foresee a continuation of such a shift in savings behavior on the part of Indian retail and institutional investors with higher equity ownership through participation in the secondary markets.

2009 Election Results—A Seminal Event
While the 2009 elections seem like eons ago, we believe that they were a seminal event in India’s history and most encouraging for the sustainable long-term development and growth of the Indian economy. In 2009 the Indian electorate delivered its most unanimous verdict since 1991 and brought the Congress-led UPA back to power with

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economic and social issues specific to India. Investors in India may be unaware of corrupt practices in some invested companies. Tensions with Pakistan have threatened regional stability since 1947. Liquidity risk: Liquidity in small and mid-cap companies tends to be thin in India. This meant that for the first time since 1995. While the jury is still out as to whether or not the current government has really been able to break the shackles. 3) attracting stable capital flows from overseas into the country. including but not limited to risk of losing some or all of the capital invested. Though there have been no major attacks since 2008. The Corruption Perceptions Index measures the perceived levels of public sector corruption in 178 countries worldwide. which adds some amount of liquidity risk. some of the key areas of focus for the government have been 1) improving public finances. 2) taking action on government owned asset-divestment—to raise funds/resources. Investment Risks Country Risk: Investments are subject to the geographical. Currency Risk: Investors in India may be subject to the exchange rate fluctuations between their investment currency and the Indian rupee. Corruption Risk: India ranks high on Transparency International’s 2010 Corruption Perceptions Index. the chances of upward revisions in India’s economic growth prospects are better than ever. The ongoing Maoist (Naxalite) insurgency—named the single biggest threat to internal security by Prime Minister Singh—is growing increasingly violent. Political Violence Risk: Several terrorist attacks in recent years in many major cities highlight the threat posed by Islamist militant groups within India. New Delhi may be forced to take on more responsibility in tackling the Naxalites. exchange rate fluctuations and restrictions on foreign investors. and 5) addressing pending reforms in insurance. geopolitical risks (including political instability). Several years of peace talks on the disputed Jammu-Kashmir territories have resulted in little progress. pension funds. banking. an issue that has hitherto been considered an internal matter for individual states to deal with. With these efforts. warnings of pending attacks are becoming increasingly common and future attacks in major cities are a possibility. aviation. or be subject to investment limits. high volatility. political. It should be noted that investments in India are subject to the normal risks associated with emerging markets. Tax risk: Tax treatment of foreign investments in India may be changed by the Indian government without notice. Volatility risk: The Indian stock markets are more volatile than the stock markets of the developed economies of Western Europe and North America. The latest—the November 2008 Mumbai attack—resulted in over 180 deaths.INDIA close to a majority seat count—the highest for any party since 1991. 4) resolving infrastructure bottlenecks. retail and telecom. India had the opportunity to break the shackles of coalition politics and channel its efforts toward cohesive and allaround growth. 5 . variable liquidity. Regulatory risk: Foreign investors in India may be restricted from investing in certain sectors or companies. The Mumbai attacks led to deterioration in Indo-Pakistani relations due to Indian government’s allegations of Pakistani government agencies’ involvement in the attacks.

1 1980s 6.4 74.4 21.0 4.4 3.6 6.5 3 105.5% 191.6 25.9 25.2% 732 138 17.4 5.1 23.8 7.8 11 46 Source: CSO & Oppenheimer & Co.3 4.4 6.7 2.3 10.9 111.7 -61.4 3.6 3.7 106.6 19.8 11.7% 642 123 17.INDIA India: The Structural Transformation Stronger Ability To Withstand Shocks And Down-Cycles Exhibit 1: India Economic Indicators 1970s to Present India's Growth Story In Numbers .3 18.3 1990s 5.7 4.5 6.7% 34.3 64.Centre+States (% of GDP) Fiscal Deficit.5 10.4 6 8 10.7 81.4 10 65.7 31.1 30.7 7.0% 37.3 37.5 4 5.9 166.5 14.7 8. Exhibit 2: India Economic Indicators FY05 to Present India Economic Indicators National Accounts GDP Current Prices (Rs.1 4.6% 252.8 17.0% 7.1 40.8 FY09 49832 1249 2.4 7.4% 113 12.5 10.2 257.0 3.6 6.4 -2 6.9 45.9 9.8 55.2 4.1970s to current Variable The Real Economy Real GDP Growth Agriculture Industry Services Savings and Investment Private Consumption Expenditure (% of GDP) Savings (% of GDP) Investment (% of GDP) Government Finances Fiscal Deficit.8 3.6% -38.7 128.7 1.3 43.4 32.6 44.3 64.8% 299.7 4.8 8.5-8.1 -51.6 FY05 7.5 7.7 6.9% -28.0% 4 3.1 -9.2 4.5 0 8.1 2000-04 5.4 8.5 11 50 37 37.7 5.1 4.9 8.1% 141.7 36.4 53. Reserve Bank of India FY05 31494 700 1.5 8 52 37 37.1 -2.6 -91.011.8 9.9 FY08 9.2 157.5 10 6.6 4.5 3.6 0.7 53 37 36.2 7.2% 36.9 12.2 -29.6 6.7 6.75 1 8.5 3.6 23.8 9.2 299.2 17.6 5.7 2.Centre (% of GDP) Inflation WPI (%) Balance of Payments Foreign Exchange Reserves (US$ Bn) Import Cover in Months Currency –Re/$ 1970s 3.4% 1088 236 18.7% 813 170 18.6 45.2 FY07 9.5 FY06 35867 810 1.8 3.6 FY10 7.2 5.5% 260 11 44 17.9 8 6.1 11.6 3. B) GDP Current Prices ($B) India's share of world GDP % Gross National Savings % of GDP GDP per Capita Debt Level Total External Debt (US$B) Debt to GDP Ratio International Transactions Current Account ($B) Capital Account ($B) Net FDI ($B) External Trade Exports Imports Trade Balance Production and Domestic Demand IIP Prices CPI WPI Source: CSO.6 15.4% 36.6 35.6 8 FY10 53071 1330 2.5 48.6 3.5 8.2 24.1 14.6 44.1 FY09 6.3 32.8 6.4 8.6 10.4 10.5 28 3.9 182.8 11 11.0% 145.6 6 .2 4.9 190.2 FY06 9.5 -117.8% 35.6% 31.5 189 307.5 FY11E 8.8 6.6 4.8 5.8 -15.7 65.4 FY07 41292 913 1.2 58.0 6.5 17.7% 1031 225 18.1 -9.4 43.5% 1158 247.0% 241.7 39.4 FY08 47234 1173 2.2 9 6 8.7 7.9 9.4 6 7.7 -118.3 19.5 6.9 7.1% 38.

Oppenheimer & Co estimates.0% 0.0% 5.0% Forex Reserves ($B) (1970s to present) 350 300 250 200 150 100 50 0 Re-US$ Exchange Rate (1970’s—present) 60 50 40 30 20 10 Trade Balance ($B) Exports 600 500 400 300 200 100 Imports 0 2010E 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 0 FY05 FY06 FY07 FY08 FY09 FY10 Source: SEBI.0% 2.INDIA Economy—India at a Glance Exhibit 3 Annual GDP Growth Trends Nominal GDP growth 18% 16% 14% 12% 10% 8% 6% 4% 2% Apr-06 Apr-07 Apr-08 Apr-09 Feb-07 Feb-08 Feb-09 Dec-06 Dec-07 Dec-08 Dec-09 Feb-10 Apr-10 Industrial Production Growth Real GDP growth 20% 15% 10% 5% 0% FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E 0% Jun-06 Jun-07 Jun-08 Jun-09 Aug-06 Oct-06 Aug-07 Oct-07 Aug-08 Oct-08 Aug-09 Oct-09 Jun-10 Aug-10 -5% Wholesale Price Index (1970s to present) 10.0% 4. RBI.0% 6.0% 1.0% 8.0% 3. CSO.0% 7. 7 .0% 9.

we believe investors can look forward to four more years (through 2014) of political stability. Key factors supporting our enthusiasm are demographics.) Earnings Growth Accelerating through FY12 India’s growth is highly geared to capital flows. above FY10’s 7. In 2009.75% range in FY11 (ending March).INDIA Key Points 2011—A Great Time to Visit India India’s share of world GDP has been gradually growing from 1. 2) the potential for a further decline in India’s equity risk premium as the inflation outlook continues to improve and 3) the rupee’s revaluation potential versus the US dollar. Without assuming significant reforms. Recently. IMF expects the Chinese economy to grow by 10. We expect India’s GDP share to continue to grow on better growth prospects. world GDP growth was -1.3% in CY09 largely due to anemic growth in the developed markets. (Note that our return calculations exclude applicable costs. We believe the Indian equity market holds the potential for annualized returns in the vicinity of 12-18% in rupee terms.4% and is expecting growth of at least 9% in FY12.5-8.8% in CY05 to 2. the foremost technical factor anchoring our outlook entails the vast underowned status of Indian equities both at the domestic and international levels (retail and institutional). the IMF global growth forecast for 2010 is 4. the IMF said that India's GDP growth is expected to accelerate to 9. 8 . With a stable Congress-led UPA government at the helm. India’s GDP growth has averaged 8. we believe growth will continue to be robust post recent recovery in FY11 and through FY12.5% in 2010.75%.5%. We are bullish on the Indian economy and equities in particular despite more than doubling of the BSE Sensex (the Bombay Stock Exchange Sensitive Index) from yearly lows in March 2009. devoid of resistance from coalition politics as was the case in the preceding five year term.9% coupled with outsized growth in India. More important. and 15-21% in US dollar terms over the next 5-10 year horizon. In our view. While the growth forecasts made by IMF and the Indian Government are not comparable. Our return outlook reflects 1) our expectation for an annualized medium-term earnings growth outlook in the vicinity of 12-18% in rupee terms. we believe. the Indian equity market is one among very few markets around the world that looks poised to advance on a long-term bull phase over the next several years. the new government.3% since FY05. and the government’s strong mandate has already improved the outlook for such flows.5-8. a sound medium and long-term earnings outlook.4% in 2010 as robust corporate profits and favorable financing conditions fuel investments. The Indian Government expects GDP growth in the 8. Comparatively. In addition. has already shown more latitude with policy reforms. a vastly improved policy backdrop and India’s allure at a point in history where its growth premium is most likely bound to reset at higher levels. devoid of pressures from the Left Front. The Indian Government recently forecasted GDP growth for FY11 to be in the range of 8. both estimates put India second behind China in GDP growth.

Thus. The risk here. compared with India—which constituted only 1% of the US’s net imports in the same year. Low Share in World Merchandise Trade Makes It Less Susceptible To Protectionism India is potentially at a lower risk of protectionism than other emerging economies due to its low contribution to world merchandise trade. is that rising imports due to strong domestic demand and concerns that export growth may be slow could add to the widening current account gap.INDIA Domestic Demand A Positive For India Vs. India’s Planning Commission deputy chairman stated that the government expects the current account deficit for FY11 to be just above 3%.1% to net world merchandise exports compared with China. India is considered primarily a domestic economy—its share in world trade is a measly 1. though. India’s large investment program and the demographic dividend of a growing.1%. Other Emerging Markets Exhibit 4: India—Strong Domestic Sector Public consumption 80 70 60 50 40 30 20 10 0 Pvt consumption 2005 Source: CSO Share of Consumption to GDP (%) Has Remained Largely Consistent Over The Years Around 85% of India’s aggregate economic demand is domestically driven. India contributes only 1. it would be much easier for a country like the US to impose restrictions on a larger player like China (which contributed to a substantial 16% of its net imports in FY08). Low Contribution of Exports to India’s GDP India ranks pretty low in comparison with other emerging economies in terms of contribution of exports to GDP.7% of the world exports.9% of GDP) compared with a high current account surplus (6% of GDP) for China in 2009. young and educated middle class are likely to continue to drive strong domestic demand. with exports constituting only 21% of its GDP. which accounts for 8. with the country actually running a current account deficit (-2. This makes India less dependent on exports for its 9 2006 2007 2008 2009 2010E . Recently. India also has enough forex reserves (an import cover of 11 months in FY10) to take care of capital flight and has a high outgoing FDI (foreign direct investment) component compared to emerging economies. The headline numbers in terms of trade deficit also favor India.

both from a macro and market perspective. This shift.INDIA economic growth and hence reduces the possible impact of protectionism on the Indian economy as a whole. where a declining young population and a growing retiree base is slowly moving toward an inverted workers-to-retirees pyramid. presenting opportunities for both the government and financialservices providers to channel those savings productively. The number of Indians in the working age group of 15-64 years is forecast to rise from 63% of the population in 2006 to 68% in 2026 (source: Indiastat). India today resembles the situation of the early 1990s in the United States and the 1980s in Korea. In other words. private-sector employment. with its higher salaries but lower job security. include benign fiscal implications stemming from a wide generational pyramid of workers-to-retirees. even though it may result in lowering of its net exports. Other positives. Public-sector employment. young population economy means that the visibility of nominal and real earnings growth is high. the ratio of workers to retirees is high. Also. we believe. can only boost demand for new financial products and the need for Indian investors to remain in charge of their own savings. A well-run. for this kind of an economy. the acceleration stage in the purchase of financial assets lies ahead. Contrast this with the situation in the US and more so in Japan. Favorable Demographics Make the India Growth Story Resilient and Insulated India’s young populace represents one of the Indian market’s most compelling total-return drivers over the coming years. 10 . with its social-security guarantees. Exhibit 5: Younger Population Mix—A Longer-term positive Source: World Bank data for 2005 The working age population is defined as the population between the ages of 15-64. is increasing rapidly. is declining.

Exhibit 7: Ratio of the Inactive Elderly Population Aged 65 and Over To The Labor Force 2 050 20 00 100 80 60 40 20 0 Source: OECD 2008 Market Tailwind From Underowned Equities And Wealth Creation Traditionally. Over the past several years. Indian households have hoarded cash and gold.INDIA Exhibit 6: Proportion of Working Age Population to Total Source: CIA World Factbook 2009. has laid the foundation for a major shift in the way 11 . India’s transition to an increasingly market-based economic system associated with lower taxation. increased transparency and growing economic and informational integration with the rest of the world.

Exhibit 8: India’s Share of Investment to GDP Second Only To China FY05 45 40 35 30 25 20 15 10 5 0 FY09 Source: CSO Exhibit 9: India: Rising Trends in Domestic Savings and investments Investment to GDP 45 40 35 30 25 20 2003 2004 2005 2006 Savings to GDP 2007 2008 2009 2010E Source: CSO Limited Investment Options for Overseas Investors As the Indian growth engine powers ahead. there is ample reason for India's viability as a destination for foreign investment. In fact. Going forward. including their savings. we foresee a continuation of such a shift in savings behavior on the part of Indian retail and institutional investors.INDIA Indian households manage their finances. more and more overseas investors are looking at investing in India. 12 .

making the country a real opportunity for investors looking for sustainable returns in the medium to long term. investment friendly policies and progressive reform processes are all likely to combine to make a strong case for India to have a larger share in the overall investment pie. 13 . The government has the challenge to revive growth in a difficult global environment and to deal with a large fiscal deficit. A positive outlook. India is one of the few economies growing at sustainable 6%+ levels (source: CSO). pension funds. macro-economic indicators. aviation. consumer products companies are witnessing solid growth. are rapidly improving. Some of the key areas of focus for the government include 1) improving public finances. With disposable incomes rising. Indian companies are becoming increasingly competitive. banking. partly hinges on the government’s policy response and partly on global outcomes. 2009 General Elections—A Seminal Event Back in June 2009. higher disposable incomes. Also. retail and telecom. With these areas in focus. India’s market infrastructure. the chances of upward revision in India’s economic growth prospects are better than ever. In addition. the Indian electorate delivered its most polarized verdict since 1991 and brought the Congress-led UPA back to power with close to a majority seat count. and in adoption of the latest technologies from across the world. while not yet of the same standards as those of developed markets. helping place the country on the radar screens of investors worldwide. 2) taking action on disinvestment—to raise resources. India is also one of the fastest-growing mobile phone markets in the world. being less encumbered by coalition politics as was the case for the prior government during 2004-09. and visibility. The current government has more latitude with policy reforms. and 5) addressing pending reforms in insurance. regulatory institutions and corporate governance. an emerging and broadening middle class. 4) resolving infrastructure bottlenecks. a low cost competitive workforce. We believe with four more years of stability at the top. 3) attracting stable capital flows in to the country. The Congress party won over 200 seats— the highest seat count for any party since the Congress won 244 seats in 1991.INDIA Improving macroeconomic fundamentals and greater integration with the world economy have increased India’s global competitiveness. global in both focus and reach. Rising incomes combined with low-interest financing have also given the automobile industry a big boost. These companies are scoring well in innovation and sophistication of operations. however.

Manmohan Singh (India’s current prime minister) and the Congress led a coalition called the United Progressive Alliance (UPA). according to estimates of national income. It covers an area spanning approximately 1. Singh. According to Central Intelligence Agency estimates.2% of the total population still lived in villages.3% of the population in 1950-51 to 67. which was backed by the Left parties. Indian politics has been dominated by three major parties since the 1980s—the Congress Party. In 2004. 1950. The world's second most populous country.INDIA India—An Overview India gained independence from Great Britain on August 15. Singh. Pakistan in the west. The country shares its borders with the People's Republic of China. the Left parties withdrew support from the UPA government in July 2008 in protest against the government’s decision to proceed with the Indo-US nuclear deal.345 rupees (Rs) in 2009-10 against Rs 40.141 in the year-ago period. the Janata Dal (JD) and the Bhartiya Janata Party (BJP).5 years and 72. 14 . The largest democracy in the world. The 2001 census reported that 72.6% of the population in 2005-06. India’s life expectancy for males and females at birth is now 67. India is a federal republic with 29 states and 6 union territories. Around 35. Dr. India holds general elections every five years. India's population remains predominantly rural. The Congress government in 1991 got the liberalization ball rolling by encouraging greater private sector participation and by initiating capital market reforms. Nepal and Bhutan in the north. Dr.588 in FY10 against Rs 31. 1947. is situated in Southeast Asia. In the subsequent elections held in June last year. was instrumental in pushing ahead with the reforms process that liberalized India's economy. Although migration from rural to urban centers has increased steadily. and Myanmar and Bangladesh in the east. India.3 million square miles.6 years. According to the Indian Government’s data. However.15 billion. Per capita income (at 2004-05 prices) stood at Rs 33.821 in the previous year. The literacy rate increased from 18. the seventh-largest country in the world.6% of India’s population is below 14 years of age. having served 12 terms at the helm with 7 prime ministers elected. among others. The Congress Party has historically adopted secular and socialist principles. The Congress Party has been the most dominant party in Indian politics. The opening up of the economy gave India a vibrant and economically empowered middle class that forms the crux of its current expansion and growth. India has a total population of around 1.5% to 44. according to recent Census Bureau estimates and is expected to reach 1. respectively in 2009. the th Congress Party-led UPA coalition won the 15 LokSabha elections with the highest majority for any party since 1991 and once again formed the government under the leadership of Dr. Its Constitution took effect on January 26. the then finance minister. per capita income grew by 10.27 billion by 2016.

as measured by Purchasing Power Parity (PPP). India’s huge population results in a per capita income of just $2.7% in a global macro-impacted FY09. and strict limits on the entry of foreign capital as well as technology.070 at nominal rates in 2008. in its June 2010 update. and 5) domestic political instability. Currently. trade protectionism. the Indian economy is the fourth-largest in the world. the government instituted a program of structural reforms aimed at stabilizing the economy and promoting reliance on market mechanisms. In fact. Following independence.4% in FY10. it is the 12thlargest with a GDP of $1. The balance of payments crisis in 1991 threatened to destabilize the economy.960 at PPP and $1. classified India as a “lower middle income” economy. regulation & control of private enterprise. This protectionist regime limited India's economic development until the mid-1980s. up from 6. which had a large Indian population. 3) the reduction in remittances from the Persian Gulf. state ownership. and 3) control of budget deficits. In response to this crisis. Reserve levels were down to two weeks of imports in spite of an IMF loan of $1. inflation high. lacking. The main components of the structural reform program were: 1) exchange and trade liberalization. Further exacerbating the crisis were factors such as 1) a widening fiscal deficit. Measured in US dollars. commercial borrowing almost impossible. India pursued a developmental policy based on strong centralized planning. when a movement toward liberalization and market orientation of the economy took shape. India's financial credibility was low.3 trillion in 2009. However. At that time. 4) the collapse of the Soviet Union and the resulting pressures on India's exports. The World Bank. and FDI (foreign direct investment). it is the second fastestgrowing major economy with a GDP growth rate of 7.INDIA Exhibit 10: World Population (in millions) as of July 2009 1400 1200 1000 800 804 600 400 200 0 China India Africa Europe North America 338 1330 1148 975 Source: Internet World Stats Indian Economy Overview The Indian economy has been witnessing exceptional growth since the last decade and is among the fastest-expanding economies in the world. 2) an increase in petroleum imports coupled with oil price spikes due to tension in the Persian Gulf. inflation as well as currency 15 .8 billion. 2) financial sector reform. India was running a current account deficit of around $10 billion.

2005 Launch of the Indian National Highway Development Program for the construction of 17.161 kilometers of highways also known as the Golden Quadrilateral Project The planned introduction of Goods and Services Tax (GST) by April 2011 (delayed by a year). Growing investor interest in India based on strong fundamentals as well as government initiatives led to an 11% year-over-year rise in total FDI inflows in 2008-09. as a measure of tax reform. The Indian Government instituted significant reform initiatives. 16 . Pension reforms (through the 2003-04 budget) and introduction of a new restructured defined-contribution pension system for new entrants to central government services. The program promoted foreign technology transfers and foreign investment in certain sectors of the economy as well as further development of the private sector. further reform initiatives were instituted. except the armed forces. From 1999.INDIA supplies. • • • • • In addition. The Indian Fiscal Responsibility Act passed in 2003 to provide a legal and institutional framework for controlling deficits and stabilizing debt. This is in line with tax reforms focusing on an efficient and harmonized tax system. such as rationalization of income tax rates. during this period. refining and banking sectors as well as opening up the insurance and broadcasting sectors to FDI inflows. Implementation of a scheme called States Fiscal Reform Facility (2000-01 to 200405) to facilitate fiscal reforms by states. including: • The Indian Electricity Act passed in 2003 to encourage competition in the power sector. 25 states and 6 union territories had introduced VAT (Value Added Tax) in place of the sales tax by December 31. the government raised foreign direct investment limits in the telecommunications.

the services sector remained the largest contributor to GDP. During 2009-10. Investment and industrial activity.6%).6% in 2009-10. with the move towards gradual liberalization.4%. social and personal services (5. Despite the uncertain outlook for developed economies. further monetary tightening in the pipeline and the beginning of pullout of fiscal stimulus. with 8. construction (6. a rebound to the 8-9% growth rates seen before the 2008 crisis is very likely in FY11 and FY12. Growth was primarily driven by robust performance of the manufacturing sector on the back of government and consumer spending.4% in FY10 exceeded the government forecast of 7. real GDP growth in India is expected to accelerate in FY11 and FY12. the Indian economy registered growth of 7.75% in FY11 and 9% in FY12. A majority-led governing party at the helm —the Congress Party—bodes well for continued economic reforms. financing. transport and communications (9. According to government data. community. GDP growth rate of 7. trade. while consumer sentiment could be dampened by persistent high inflation. insurance. which is more oriented towards the domestic market. electricity. hotels. with the government forecasting GDP growth of 8. Per capita income is estimated to grow at 5. While sustained annual double-digit growth remains a few years away.6%). gas and water supply (6. real estate and business services (9.7%).34%.3%). privatization and deregulation expected to continue under the current government. manufacturing (10. Economic activities which showed significant growth rates in 2009-10 were mining and quarrying (10.3% in F4Q10. For the recently concluded financial year 2009-10.6% year-over-year growth in F4Q10. the manufacturing sector witnessed growth of 16.8%).5%). should sustain growth.5-8.5%). Petroleum & Natural Gas Chemicals Power 17 .2%.INDIA Exhibit 11: FDI Breakdown – By Sector (US$ Billion) 7 6 5 4 3 2 1 0 FY09 FY10 Telecom Services Construction Activities Automobile Industry Computer S/W and H/W Housing and Real Estate Metallurgical Industries Source: Reserve Bank of India and Oppenheimer & Co Gross Domestic Product GDP Growth India’s average yearly real GDP growth from 2000-01 to 2009-10 was 7.

transport. However.9% Agriculture & Other 17% Services 57% Industry 26% Constru ction. 3 0.4% 26.9% 56. 18 . 14.INDIA Composition of GDP Exhibit 12: India GDP Share FY10 Agriculture & Other Agriculture Mining & Quarrying Industry Manufacturing Elec.0% 7.3% Financin g insuranc e. 8 5. Gas Water supply Construction Services Trade. 62.9% 26. Gas Water supply.5% Manufa cturing. h otels. contributions from the manufacturing and services sectors toward GDP growth have outpaced that of agriculture.0% Source: CSO Historically.1% Agricul ture. real estate … Trade. Growth rates of the various economic sectors (measured in 1999-00 prices) during 200304 to 2009-10 are shown below. hotels.5% during 1951-52 to 1955-56—the Indian Government’s first Five-Year Plan). c omm 49.6% 2. realestate Community Social and personal services Mining & Quarry ing. in subsequent Five-Year Plans.2% 13.5% Elec. the agricultural sector had been the largest contributor to GDP (52.5% 17. tra nsport.0% 16.7% Social and personal services. 3% 17. 24.1% 2.0% 14. communication Financing insurance. 7.

3 8.27 1.8 12 12.6 5146.95 1698. Reduced import duties on many iron and steel products. insurance.091. transport and Comm Financing.063.60 1.1 5.00 1152 Total Expenditures (INR Billion) Non-Plan Expenditures.7 6.502.7 2009-10 0.00 1.076.92 3. social & personal services GDP at factor cost 10 3.8 2005-06 5.38 2008-09 8. Lowered customs duty on other petroleum products to 5%.6 3.03 435.9 9.064. forestry & fishing Mining & quarrying Manufacturing Electricity.152.00 2. crude and refined edible oils.9 6.23 2005-06 5.3 10.6 10.38 3.215.127.2 8.3 11.38 4.8 2008-09 1.050.6 4.87 4.833.6 5.2 3.7 7.4 7. real estate & business services Community.057.8 11.09 687.982.29 1139.7 6.1 13. Exhibit 14: Total Expenditures of the National Government 2003-04 4.8 5.1 2006-07 4 8.1 5.3 9.2 10.00 6.5 6.82 5.76 663.11 444.406.8 5.98 2. the government: • Reduced import duties on food items.00 3.52 3.82 534.269.88 432.135.7 5.INDIA Exhibit 13: Growth in GDP By Sector (% annual real change) 2003-04 Agriculture.944.3 11. the excise duty rate on most of non-petroleum products was reduced by 4% Fully exempted aviation turbine fuel (ATF) from import duties to aid the aviation industry • • • • • With reference to government finances.32 5.6 10.712. gas & water supply Construction Trade.29 2004-05 4.1 10.3 8.00 884 1.94 1182.4 Source: CSO The surge in oil and commodity prices during the first half of 2008-09 shifted the focus from growth to containment of spiraling inflation.310.74 1. even after the supplementary demand for grants is taken into account. As a part of fiscal stimulus package.5%.922.9 3.297.50 1.8 4.4 13.659.6 1.03 3.393.00 1.752.326.30 482. This should help stabilize market expectations of liquidity and interest rate movements.80 3.23 1.620.00 733 1.53 1.78 2007-08 7.6 7.00 902 2009-2010 10.087. including (a) Interest Payments (b) Defence Expenditures* (c) Subsidies Plan Expenditures Revenue Expenditures Capital Expenditures Source: CSO 19 .72 516.489.840. Higher than expected realizations on 3G and broadband wireless access (BWA) auctions combined with buoyant tax revenues have virtually eliminated the risk of the fiscal deficit overshooting the targeted 5.9 16.and wholly-milled rice.7 2007-08 4.1 6.195.35 1.9 7.62 2006-07 5.2 5.62 447.4 2004-05 0 8.1 16. In line with this.322.5%.34 438.651.00 7.1 12.00 2.00 7. Imposed an export duty of INR 8000 PMT on basmati rice.2 12. hotels.938.19 674.843.240.8 13.8 1.3 11.710.9 5. Abolished import duties on crude petroleum and reduced import duties on petrol and diesel to 2.00 9.30 542. including semi.5 9.222.8 6. the fiscal deficit appears to be conforming to the estimates made in the Union Budget for FY11.

restaurants. The service sector (including construction) now accounts for about 62% of the country’s GDP. Naturally. financial services and business services. High growth in the sector comes from a wide array of services.INDIA Exhibit 15: Growth in Services Remains Robust Service sector 25% 20% 15% 10% 5% 0% Community and social services Agriculture 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Industry Services Source: CSO Service Sector to Lift Economic Growth In India. higher income is changing consumption patterns. communication. food and entertainment. 20 . Given the plans for infrastructure investments in roads & ports. services constitute a higher mix of GDP versus that for other emerging market countries. trade. dramatically increasing the demand for travel. Additionally. These include construction. service has been a major driver for the economy’s current high-growth path. the construction sector we believe should remain on a double-digit growth path. planned investment in housing and commercial real estate and continued capex by Indian companies. hotels. transport. Its share was about 40% in the early 1980s.

hotels. gains in activity are now being seen more broadly. including in the major advanced economies. banks have raised capital and wholesale funding markets have reopened. It will still take some time. Global View of GDP The global economy is expanding again. growth in construction and trade & hotels services has picked up with an overall increase in economic activity and business sentiment. social and personal services have recorded average growth of 6. However. US dollar depreciation. Cuts in interest rates. The growth rate in community. and commodity-specific factors.8% annually over the past four years. In the oil market. At the same time. Low consumer confidence and reduced household incomes and wealth are holding consumption down in many advanced economies. Emerging and developing economies are further ahead on the road to recovery. activity and credit growth are likely to remain subdued in many economies. Going forward. and high unemployment poses major social challenges. Trade. real estate and business services has recorded average growth of 10.7% in the preceding five-year period. financial markets remain impaired. commodity prices have rebounded ahead of the recovery. The downward drag exerted by the financial shock. The recent rally in commodity prices has been strong and broad-based. Financing. until the outlook for employment improves significantly. led by a resurgence in Asia—in general. Their recoveries are proceeding at a sluggish pace. transport and communication has recorded 11. Many housing markets have yet to bottom out.4% in the previous three years when the impact of fifth pay commission wage hikes was felt. the sharp fall of global trade. led by mushrooming growth in communication services. reflecting improved market sentiment.6% growth annually over the past four years. public guarantees. emerging economies have withstood the financial turmoil much better than expected. which reflects improved policy frameworks. supportive forces are still weak. Strengthened domestic demand helps emerging market economies maintain growth in the face of lower exports. and the general increase in uncertainty and collapse of confidence are gradually diminishing. and bank balance sheets still need to be cleaned up. credit easing. and bank recapitalization have appreciably lowered concerns about systemic failure and have supported intermediation. and emerging market risks have eased.INDIA Key highlights of growth in the services sector in the recent past include: • • Construction recorded growth of 12. and institutions restructured. however. social & personal services has declined sharply as fiscal stimulus has eased. Bank lending conditions are expected to remain tight and external financing conditions constrained for a considerable time. insurance.7% over the past two years compared with 6.5% (IMF estimates) during 1H2010. and financial conditions have improved markedly. However. In this setting. Community. prices have responded strongly to perceptions that market dynamics are shifting from significant oversupply to more balanced conditions. Most advanced economies and a few emerging economies still face large adjustments. the pace of recovery worldwide will depend on the balance between opposing forces. Financial market sentiment and risk appetite have rebounded. Growth in the financial services sector has remained steady but has not expanded because of continued uncertainty in the financial markets. a low rate considering that they are emerging 21 . • • As of late. continued provision of ample liquidity. Importantly.0% in previous seven years compared with an average growth of 11. These advanced economies grew only about 3.

followed by a reacceleration of activity. However.8% in 2010 and 4. however. growth is projected at only 2. and unemployment. respectively. respectively.2% in 2011. WEO projections are that output of emerging and developing economies will expand at rates of 7.7% and 2. Inflation is projected to stay generally low. The IMF forecasts global activity to expand by 4. Slack likely will remain substantial. Their recoveries are expected to remain fragile for as long as improving business investment does not translate into higher employment growth. persistently high. with some economies slowing noticeably during 2H2010 and 1H2011.1% and 6. 22 . with a few exceptions among the emerging economies.INDIA from the deepest recession since World War II. in 2010 and 2011.2%. In advanced economies. which expanded by close to 8% and where investment is propelling job creation. amid continued excess capacity and high unemployment. household spending is doing well in many emerging market economies.4%.

9 12. In FY09.7 295.0 61.763. somewhat marred by global macro-led weakness in FY09. Rising foreign exchange reserves have provided the country a cushion against a potential slide back into recession.379.2 6.7 264.2 487.2 241.310.7 401.003 0.1 0.375.6 Source: Reserve Bank of India As the tables above show.2 0.2 0. The official reserve assets as of September 2010 were US$291.3 6. Increased focus on reforms in the post-1990 era attracted more foreign investments to India.9 107.4 50.31 1.4 135.0 9.287.046.2 309.614.7 4.3 167.662.9 256.4 3.7 280.6 billion.9 11. Foreign currency assets expressed in dollar terms include the effect of appreciation or depreciation of non-US currencies (such as the euro.1 191.6 145.76 0.9 8.8 6.9 182.366.6 Reserve tranche position 31.98 1.2 6.0 20.7 12.2 billion in the form of FDI and FII.98 Total 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-2010 As of September 2010 0.1 0. in FY10 to date.44 0.9 811.6 18.2 196.4 17. However. India recorded cumulative foreign investments of US$155.9 13.960. 23 . Countries hold foreign-exchange reserves partly to protect themselves against external crises.2 2.1 291.901. India’s import cover increased to 11 months in March 2010 from a mere three weeks at the end of December 1990.931.472.44 0. A significant part (over 65%) of the decline stemmed from the movement of the US dollar vs.2 5.004 0.083 3.018 0.005 0.5 151.2 12.002 0.3 8. Exhibit 16: Foreign Exchange Reserves INR Billion End of financial year SDRs Gold Foreign currency assets 3.191.2 12.9 Total SDRs Gold US$ Billion Foreign currency assets 71.0 141. Foreign exchange reserves grew from US$5.7 0.8 billion in 1991-92 to US$280.2 4.2 255.-Mar.67 1.9 56. gold and foreign currency assets are the major contributors to India’s growing foreign exchange reserves.0 76.7 12.8 10.1 0.) led recovery.7% year over year.1 113. forex reserves have rebounded nicely.7 89.8 4. up 11% YoY to $280.825.7 20. India’s foreign exchange reserves declined by 18.1 2.002 0.47 0. An increased current account deficit in 2008-09 coupled with the exodus of foreign institutional investors during the year also contributed to the decline in foreign exchange reserves.5 Reserve tranche position 0. the sterling and the yen) held in reserves.9 33.5 4.9 62.5 5.026 5.0 0.9 900.9 299.39 1. other currencies.473. or US$57.6 199.7 251.682.001 5.414.7 billion.0 11. primarily due to a positive capital-account balance.INDIA Foreign Exchange Reserves India’s foreign exchange reserves have been rising consistently and expanded at a CAGR of 20% during 2002-03 to 2009-10. During 1991-92 to 200809.1 billion in 2009-10.1 billion with a 2HFY10 (Oct. leading to significant growth in foreign exchange reserves.

respectively. as we explain later).17 billion in 2009-2010 compared to US$27. IMF. and advertising and film production. bureaucratic hassles.INDIA Exhibit 17: Import Cover Comparison of Various Countries Source: Thomson Reuters. To encourage FDI. and infrastructural deficiencies. petroleum and natural gas. has increased. including banking. India has generally been perceived as a good investment destination by foreign players given its vast potential and burgeoning middle class. the Indian Government has allowed 100% foreign ownership in the development of integrated townships and regional urban infrastructure. it lowered the cap on FDI in the domestic airline industry and basic and cellular telecom services. The government made the following policy changes to stimulate growth: • The central government has divested some of its powers of approving foreign investments that it exercised through the Foreign Investment Promotion Board (FIPB) 24 . In 2004-05. yearly contributions from Singapore and the US have exceeded $3 billion and $1 billion. the inflow of foreign investment in India.3 billion during 2008-09 and US$24. but continues to be subject to government-imposed limits in certain industries. shortages of power. Mauritius continues to be the top contributor to the FDI inflows in India (largely for tax reasons. India received an inward FDI equity flow of US$34. including services. For the last two years. Due to the liberal policies pursued post the Persian Gulf crisis. Economist Foreign Investment Despite the political uncertainty over reforms. According to the Ministry of Finance. Foreign investment is now allowed in all major sectors. FDI is also permitted in FM radio broadcasting.6 billion in 2007-08. In January 2004. the tea industry. the government revised FDI limits in several sectors. FDI as well as portfolio or foreign institutional investment (FII).

minority foreign equity of up to 49% is allowed. The FDI policy for the civil aviation sector allows up to 100% FDI in greenfield projects under the automatic route and up to 100% FDI in existing projects with prior approval from the government for investment beyond 74%. In the publication of similar editions of foreign newspapers. In the financial services sector. • • • • • • Foreign institutional investors are also significant contributors to the rising levels of foreign investment in India. attracted to the robust growth in Indian capital markets. depositories. stock exchanges. • • • • • For petroleum and natural gas. the government clarified that 100% FDI would be allowed in setting up new as well as in established industrial parks and would not be subject to conditions mentioned in Press Note 2 (2005). In the case of asset reconstruction companies (ARCs). Allows 100% FDI in new sectors such as power trading. allows 100% FDI in distillation and brewing of potable alcohol. FDI is allowed up to 74% in fields such as private banks. Under the new guidelines. processing and warehousing of coffee and rubber. FDI of up to 100% is allowed with prior consent of the government. industrial explosives and hazardous chemicals. the government took the following policy decisions: • Deleted the condition of compulsory divestment of 26% equity within five years for actual trading and marketing of petroleum products Increased the FDI limit to 49% from 26% in petroleum refining by PSUs (Public Sector Undertakings) with prior approval of FIPB Decided to allow FDI up to 100% in mining and mineral separation of titanium bearing minerals & ores. Now allows 51% FDI in single brand products in the retail sector. in insurance. The Securities and Exchange Board Of India (SEBI) recently expanded the eligible categories of FII applicants to allow NRI-owned investment managers to register as 25 . FDI of only up to 26% is allowed. clearing corporations and commodity exchanges. whereas up to 26% investment by Non Resident Indians (NRIs)/Persons of Indian Origin (PIOs)/FII is allowed (with prior consent of the government) in publication of Indian editions of foreign magazines which deal with news and current affairs.INDIA and has handed them over to the general permission route under the Reserve Bank of India (RBI). Set up an Investment Commission to help raise funds in the infrastructure sector among others. Subject to other regulations. further streamlining the process. and plans to increase the limit on investment in the infrastructure sector. Increased the FDI cap for telecommunications to 74% from 49%. • Opened up many sectors in the manufacturing industry to 100% FDI under the automatic route. However.

Since 1992-93.38 2.73 2008 11. It also decided to remove the restrictions on overseas derivative instruments (ODIs) and derivatives as well as quantitative restrictions on ODI issuance capabilities.58 2009 11. follow-on overseas offers.36 0.41 9. when FIIs were allowed entry into Indian financial markets. The National Security Council has suggested legislation in which it has advised the government to suspend any foreign acquisition. The increase in limits will provide the FIIs with greater avenues to deploy their funds in the Indian debt market. The number of SEBI-registered FIIs went up to 1. more than 65% of Mauritius’ population is of Indian descent. This situation stems largely from a double taxation avoidance treaty that offers investors tax benefits and stimulates capital flows into India.21 3. Thus in total.17 27. The Indian Government has stipulated that the incremental investments of $5 billion in government securities can only be made in securities with residual maturity of over five years while incremental investments in corporate bonds can be made only in securities with residual maturity of over five years and issued by companies in the infrastructure sector.06 0. initial public offers (IPOs).94 1. FIIs can invest up to $30 billion in Indian debt securities.29 0. the government is considering a review of its foreign investment guidelines following the ever increasing risk of terror funds entering the country via various routes. Their net purchase in equities was US $23.38 1. also abbreviated Rs) against USD. On the flip side. the Government of India increased the FII limits on government securities to US$10 billion (from an earlier level of $5 billion) and in corporate bonds to $20 billion (from earlier levels of $15 billion).4 billion in FDI inflows in fiscal 2010 or 40% of total.713 by the end of March 2010 from 1.58 0.09 7. contributing US$10. Also. The bulk of these investments have come through the primary market. merger or takeover of Indian companies that could damage national interests. rather than buying via secondary markets. Exhibit 18: Share of Top Investing Countries’ FDI Equity Inflows (USD billion) FDI Inflows (USD $B) Mauritius Singapore USA Cyprus Japan Others Total Source: Department of Industrial Policy and Promotion 2007 6.82 7. Large FII inflows in to India also led to strengthening of the INR (Indian rupee.45 1.38 25. foreign institutional investment has increased over the years except in 1998-99 and 2008-09.25 billion in 2009-10 as against net sales of US$10.80 1. 26 .33 2010 10.09 0.INDIA foreign institutional investors.86 0. The FII inflows into the primary market in India come mainly through the conversion of foreign currency convertible bonds (FCCBs).07 1. private placement to qualified institutions placements (QIPs). the small island nation of Mauritius is by far the largest FDI investor in to India.635 a year ago.79 15.10 3. conversion of warrants and preferential offers.62 1.18 8.83 0. FII Inflows Foreign institutional investors play an important role in Indian securities markets.89 Surprisingly.32 billion in the previous year (2008-09).67 24. In September 2010.

the main importers of Indian products. 47.4% 189 307.5 100. 27 . therefore.9 FY 2009 -28.6 52. India’s balance of payments (BOP) registered a deficit of US$21 billion compared with a surplus of US$91 billion as of FY08. continued to be high at US$117.7 -21.4 -117. The buoyancy of domestic growth (and. the emerging dynamic between the US and China regarding trade and currency valuations is likely to shape policy actions in other economies.4 40.6 FY2010 -38. The trade deficit.1 43.3 48.5 -14 8.6 78. however.6% over a period of a little over a month.4 -1.9 41. Government sources indicated that trade deficit in FY11 may reach ~US$135B.7 106.5 44.7 90. In the coming months.3% 166. In FY10.2 Balance of payments recovering: For FY09.2 52.8 -118. The FIIs can buy quality shares through the primary route at stipulated prices with low impact cost. coupled with subdued growth outlooks in major industrialized countries.2B.6 43.1 53.7 88.2 299. however.08 to the US dollar on 31st August 2010 to Rs.7 -2.46 on 19th October. Oppenheimer & Co FY 2008 -15. an appreciation of 5.6 7. The appreciation of the Indian rupee relative to the dollar since September has been stronger than that experienced by several Asian currencies.2 15.9% 182.2 257. strong import demand). neither capital goods nor gold imports are contributing significantly to the surge. Intervention by the RBI in the foreign exchange market to stem the rise of the rupee would. Available data suggest that contrary to popular perception.7 -91.INDIA The relatively low risk in acquiring shares through the primary route and availability of bulk quantities at a discount are reasons for FIIs to invest via QIPs and conversions.3 15. Exhibit 19: India’s Balance of Payments (US$ billion) US$ billion CURRENT ACCOUNT Trade Balance Current a/c as % of GDP Exports Imports Invisibles (Net) -Service -Transfers CAPITAL ACCOUNT Foreign investment -FDI -FII Loans OVERALL BALANCE OF PAYMENTS Source: Reserve Bank of India.9 32.3 -2.2 3.9 27. particularly with regard to interventions in currency markets to support export competiveness and growth. BOP recovered to positive territory at US$15. indicates there is little likelihood of any softening of trade deficit.3 19. the adverse impact of rupee appreciation on the competitiveness of Indian exports and the current account balance is likely to emerge as a competing concern for the RBI. the Indian rupee has strengthened from Rs. 44.4 12. INR-USD Exchange rate trends: Reflecting the inflow of FII funds in September 2010. The surge in non-oil imports is the key reason behind the sharp increase in India’s trade deficit.5 17.3B. enhance the domestic money supply and counteract the efforts made by the Central Bank in the past year to manage inflation and inflationary expectations. Although a stronger rupee is beneficial in reducing the fiscal burden of the oil import bill as well as prices of imported commodities.6 36.

INDIA

Exhibit 20: INR - USD Exchange Rate Trend
60 50 40 30 20 10 0

Source: FactSet

Raising Funds through Divestments Between 1991-92 and 2009-10, the government privatized assets worth over $14.68 billion. However, the pace of divestment slowed in FY05-FY09 with the government divesting assets worth just $1.9 billion during the period. This could be primarily attributed to the Left parties, which were a part of the ruling coalition government, and unwilling to privatize government assets. Nevertheless, with Left parties out of the current equation, the government plans to divest assets worth over $5 billion every year, which we think could be far surpassed when all is said and done. FY10 saw divestments of Rs. 25000 crores, or ~ $5.56 billion, via sales of the government’s stake in Oil India, NMDC, REC and NTPC. The government has announced a divestment target of Rs. 40,000 crores (~$8.9 billion) for FY11. The recent Coal India public issue alone saw a divestment of ~$3.44 billion, taking total divestment to date for FY11 to $3.89 billion, leading us to believe that the Indian Government could easily exceed its divestment targets for FY11. Exhibit 21: Divestment (US$ Billions)

10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E

Source: Department of Divestment

28

INDIA

The Ministry of Finance pegs India’s economic growth in the range of 8.5% to 8.75% in 2010-11. A favorable monsoon season (key to agriculture) coupled with a robust recovery in the service sector has led to further confidence for a more favorable economic growth scenario in FY11. Monthly inflation—based on the Consumer Price Index (CPI)—averaged 6.3% during April 2007 to August 2010. Recently, however, YTD inflation average has been double-digits at 10.2% driven by a surge in commodity prices. Nevertheless, with the worsening of economic crisis in the last quarter of 2008, commodity prices plunged, and inflation in India began to retreat. Exhibit 22: Monthly Inflation (CPI)
14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%

Apr-08

Apr-09

Feb-08

Feb-09

Feb-10

Apr-10

Jun-08

Jun-09

Dec-07

Dec-08

Aug-07

Aug-08

Aug-09

Dec-09

Oct-07

Oct-08

Oct-09

Jun-10

-2.00%

Source: Ministry of Commerce & Industry

Aug-10

29

INDIA

INDIA IN THE “BRIC” ECONOMY— A Fact File
Exhibit 23: India vs. Other BRIC Countries (2005)
Indicator Population (mill) Surface Area GNI in $B USD (PPP terms) GDP Per Capita in US$ (PPP terms) GNI per Capita in US$ (PPP terms) Avg GDP Growth 2005-2009 Agriculture Industry Manufacturing Services GDP In $mill USD (2009) Gross Domestic Savings (% GDP) % of World GDP (2009) Inflation (2009) FDI ($B 2009)
Source: The World Bank Group and Oppenheimer & Co.

Brazil 194 8515 1988 9454 3550 3.6 4.0 -4.7 2.4 4.0 1571978 16.2 2.7% 4.8% 25.9

Russia 142 17098 2609 13553 18390 3.98 4 4.48 8.25 1230725 33.04 2.1% 2.3% 37.1

India 1155 3287 3768 2969.5 3260 8.2 3.1 8.9 9.8 10.0 1310170 29.8 2.3% 3.8% 34.6

China 1331 9595 9018 8609 6770 11.4 4.7 12.1 13.1 12.3 4984731 54.2 8.6% -0.6% 78.2

World 6775 133947 72038 9513 10632 2.3 2.9 4.1 5.2 58228178 22 100%

A comparison of the BRIC countries reveals high savings rates when measured as a percentage of GDP, ranging from 16.2% for Brazil to as high as 54.2% for China with Russia at 33% and India close to 30%. The four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.

IIP Has Rebounded Nicely Across All Segments Recent Weakness, However, A Concern
Exhibit 24: IIP April 2006—September 2010
20%

15%

10%

5%

0%

Apr-08

Feb-07

Feb-08

Feb-09

Dec-06

Dec-07

Dec-08

Dec-09

Feb-10

Apr-10

Apr-06

Apr-07

Apr-09

Jun-06

Jun-08

Jun-09

Aug-09

Aug-06

Oct-06

Aug-07

Oct-07

Aug-08

Oct-08

Oct-09

Jun-10

Jun-07

-5%

Source: Bloomberg

Since April 2006, India’s Index of Industrial Production (IIP) has averaged a commendable 8.4%, going as high as 17.7% in December 2009. Recently, in June 2010, an IIP of 5.3%

30

Aug-10

INDIA

was the lowest in 13 months. It bounced back to double-digit growth in July, however, mainly driven by the capital goods sector. During July 2010, the growth rate of the manufacturing sector, with a weighting of 79.4%, surged by 15%. Twelve of the seventeen industry groups showed positive YoY growth in July. The industry groups consisting of “Machinery and Equipment other than Transport Equipment” showed the highest growth of 49.4%, followed by 31.1% in ”Other Manufacturing Industries” and 24.9% in “Transport Equipment and Parts.” There is a strong correlation between IIP growth, sales and profit growth. As such, better than expected growth in real activity is likely to result in upside to sales and earnings growth forecast for many industrial companies. The IIP number has exceeded expectations over the past year, partly due to a depressed base since August 2008, although stimulus measures should be given their due here. In light of a subdued external environment and hence India’s export demand, the IIP number is even more commendable. Going forward, we see industrial growth picking up the pace but believe that the pace of growth can be maintained especially given a more than adequate monsoon season. With just over 40% of India's agricultural land irrigated, farm output depends heavily on rain. An above-normal monsoon season has the potential to spur rural demand, which accounts for more than half of India's domestic consumption. August and September 2010 data, which shows IIP growth of 6.9% and 4.4%, respectively, however is concerning. In fact, September’s growth was the slowest since May 2009. Widespread flooding in September in northern India and delayed withdrawal of the monsoon this year are partly to blame for sluggish growth in September. Other indicators of growth—auto sales, FMCG volume growth, consumer durable sales, non-oil imports—all suggest robust demand in the economy, and do not suggest any slackening in demand growth. However, indicators leveraged to external demand—export traffic growth and railway freight growth—indicate weakness in external demand.

India’s Rising Middle Class
Economic liberalization in India, which began in 1991, transformed Indian demographics through rising income levels and changing consumption patterns. According to McKinsey, income levels are estimated to almost triple by 2025. The country’s income pyramid is also expected to change, with India’s middle class (defined as households with annual income of between Rs. 200,000 to Rs. 1,000,000, or between ~$4,000-$20,000) expected to grow by over ten times from 50 million people in 2005 (approximately 5% of the total Indian population) to 583 million people by 2025 (approximately 41% of the total). With a growing population, the expansion of middle class and rising incomes, India should become one of the world’s largest consumer markets by 2025. Consumption is expected to increase by 7.3% annually over the next 20 years to reach more than Rs. 69.5 trillion, or $1.5 trillion, by 2025.

31

by 2025. As Indian incomes rise. The key takeaway here is that discretionary spending is expected to rise to 70% of total spending by 2025 vs. Transportation. which includes leisure travel in the mix. the largest Indian spending categories are food. rising income levels and supportive demographic trends make India one of the fastest-growing markets in the world for discretionary spending. food. 32 .INDIA Exhibit 25: India’s Rising Middle Class 120 100 80 60 40 20 0 1985 1995 2005 2015E 2025E 1600 1400 1200 1000 800 600 400 200 0 Upper Class Middle Class Underpriviliged Total Population Source: McKinsey and Oppenheimer & Co Wallet-share Shift from Basic Necessities to Discretionary Items Progressive deregulation. 52% in 2005. is expected to rise from a 17% share in 2005 to 20% in 2025—significant when viewed in the context of wallet size tripling from 2005-2025. and transportation and housing. the share-of-wallet of consumer spending should also change significantly. beverages and tobacco is still expected to be the biggest spending category. According to consultant McKinsey’s estimates. although its share is anticipated to drop from 42% in 2005 to 25% in 2025. Today. beverages and tobacco.

India ranked 7th in terms of market capitalization and 13th in terms of turnover ratio as of December 2009. Exhibit 27: Details of Indian Stock Exchanges as of Mar 2010 BSE NSE Source: BSE. India is second only to the US. NSE Year Established 1875 1992 Members Listed Companies 1204 4996 1297 1470 33 . Non-discretionary Spending 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1995 2005 Necessities 2015E Discretionary Spending 61% 48% 39% 30% 39% 52% 61% 70% 2025E Source: McKinsey and Oppenheimer & Co Stock Exchanges Indian markets figure among the world’s largest stock markets. 2009. according to Standard & Poor’s Fact Book. In terms of number of listed securities.INDIA Exhibit 26: India Discretionary vs. With the Bombay Stock Exchange and National Stock Exchange put together.

and pension funds as an indication of that intent. Indian Outsourcing Last but not least. Financial Services Financial services is an important sector of the Indian economy.INDIA Sector Outlooks We believe that India’s growth will likely be driven by the following structural themes– Infrastructure There is a need for significant infrastructure improvement in India to facilitate continued economic growth. 34 . India’s exports are now more diversified across the globe—reducing its reliance on the US—and outsourcing is increasingly diversifying into engineering. Population growth and migration from rural areas to larger towns and cities has led to significant infrastructure investments in electricity. in our opinion. financial and insurance services where current levels of penetration point toward long-term sustainable growth. telecommunications. Migration to cities and towns is thus being fueled by the movement of a young working population with growing disposable income. banking. We point to preliminary forays for policy reforms in insurance. Move Toward Urbanization India’s industry and service sectors continue to grow faster than India’s GDP. primarily for the urban populace. the Indian outsourcing model. is now increasingly being recognized as the template for global firms. irrigation and water supply. Opportunities abound in banking. generating significant employment potential. transport. We believe investments in the Infrastructure sector are not a short-term phenomenon and that they are expected to continue longer-term. A sluggish US economy poses potential shortterm challenges for this sector. pharmaceutical. However. The central government is taking steps to expand the depth of the domestic financial market. petrochemical and auto-ancillary exports.

071 $68.04 71.27 1. the sector may not offer similar upside.315 137 $3.33 81. lower NPLs and lower credit provisions.095.9 32.17 1.34 113.2 14 1.150 3.182 $26.INDIA BFSI Sector (Banking.3 8.128 $126. Interest Rate Tightening Remains a Key Risk for BankEx Index Taking into account trends in non-food credit.268 $56.2 5 388 223 91 3.395 842 593 2.0 9 530 350 114 4.74 122.1 13 202 106 142 1.6 62 2.4 14.7 33 844 345 366 2.379 $15.8 Source: FactSet.9 32.862 52 Week Book P/BV EPS High Low Value TTM 1.6 10 190 95 91 1.356.126 330 $7. inflation and growth.917 2. given the sharp recent rally over the past 5 months.277 773 460 2.4 11.304 480 $10.3 16 P/E 22.393 150 $3. Insurance) Major Players Company Axis Bank HDFC Bank ICICI Bank IndusInd Bank Kotak Mahindra Bank Yes Bank Andhra Bank Bank of India Canara Bank IOB IDBI Bank PNB SBI Syndicate Bank Ticker 532215-IN 500180-IN 532174-IN 532187-IN 500247-IN 532648-IN 532418-IN 532149-IN 532483-IN 532388-IN 500116-IN 532461-IN 500112-IN 532276-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 1.518 1. we could see further tightening from the RBI through 2010.784 $301.1 5 1.118 1.1 1 3. Pricing as of 12/03/2010.6 36 309 132 58 5.561 486 $10.32 571.19 298.392 $53.362 1.67 252.550 472 5.27 401.0 21.557 $18.060 729 $16.128 $243. bank earnings could come in higher than current estimates on improved economic conditions—better loan growth. Financial Services. Last month.3 7.79 356.069 $79.7 34.867 $17.47 119.326 161 $3.949.124 168 $3.5 11.7 443.25 1.175 $89.767 $66.3 144 164 80 108 1.031 $27. Exhibit 28: BSE BANKEX Chart 16000 15000 14000 13000 12000 11000 10000 9000 Source: Factset Data Systems Earnings visibility of the banking sector has improved with superior outlook on credit.0 51 176 85 138 1. In the short term.507 291 $6.5 14.1 95.515 1.410 $31.918 $433. the RBI increased the repurchase rate by 25 basis points to 6% and the reverse repurchase rate by 50bps to 35 11/24/2009 12/10/2009 12/29/2009 1/14/2010 2/1/2010 2/17/2010 3/4/2010 3/19/2010 4/6/2010 4/21/2010 5/6/2010 5/21/2010 6/8/2010 6/23/2010 7/9/2010 7/26/2010 8/10/2010 8/25/2010 9/10/2010 9/27/2010 10/12/2010 10/27/2010 11/11/2010 .8 1899.966 $25.524 $26. non-oil imports. margins and asset quality of the banks.608 919 396 3. We believe however. The BSE BANKEX (shown above) has registered 43% returns over the last year.8 22 588 309 275 1.272 $28.309 2.863 1.57 77.

An increase in required CRRs over the next few quarters could lead to a decline in NIM (net interest margin). Indian banks should maintain tier I capital of at least 6%. we expect better asset quality trends to drive the nearterm earnings of banks.INDIA 5%. As per Basel II norms. All banks have their CRAR above the stipulated requirement of Basel guidelines (8%) and RBI guidelines (9%). Better NPL Trends To Enhance Near-Term Earnings For Banks Bank stocks. Assuming 25bps of further tightening would take the repo and reverse-repo rate to 6. CRR currently stands at 6%. Kotak MF GOI Recapitalization of PSUs Targeting 8% Capital Adequacy Back in April 2010. Exhibit 29: Trends in Gross and Net NPLs in India (%) Gross NPL s(%) 16 14 12 10 8 6 4 2 0 1998 19 99 2000 2001 2002 2003 2004 2005 20 06 2007 20 08 2009 E Net NPL s(%) Source: Reserve Bank of India. Even as valuations get less comfortable. increasing comfort on asset quality and expectation of higher permissible limits in the HTM (hold-to-maturity) category. RBI policy on CRRs (cash reserve ratios). Capital Adequacy Levels in India Remain Comfortable The minimum capital to risk-weighted asset ratio (CRAR) in India is placed at 9%.25% and 5. could impact negatively.25%. We view this as a positive for banks that are capital constrained—midtier government owned banks. however. by the end of 2010. respectively. the Government of India kicked off the recapitalization of government owned Indian banks for FY11 by announcing an infusion of Rs165B for re-capitalization of government owned banks. have seen sharp appreciation over the past few months given their attractive valuations. An improving economic outlook could lead to an increase in loan demand and provide an impetus to earnings. Economic Revival a Positive for Banks Continuation of higher fund flows could enable enterprises to enhance their equity capital and reduce the risk of NPLs (nonperforming loans) and eventual write-offs for banks. to ensure each bank has minimum Tier-1 capital adequacy of 8%. The average Capital Adequacy 36 . 1% point above the Basel II requirement. especially those of public banks.

Exhibit 30: Total Capital to Risk Weighted Assets in India 13.80% 12. of which Tier-I capital accounted for 9. Most banks in India have capital adequacy of more than 12%.20% 13.60% 12.60% FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Reserve Bank of India Exhibit 31: CAR – Asia vs.00% 12.80% 11.INDIA Ratio as per Basel II norms improved from 12.20% 12.40% 13. the CAR of the banking system stood at 13. As of June 30.4%.48% in FY09.00% 11. Europe vs.35% in FY08 to 13.40% 12. US Source: IMF 37 .3%.60% 13.

1. Exhibit 32: Bank Assets as a Percentage of GDP (FY09) 1200% 1000% 800% 600% 400% 200% 0% 50% 1100% 650% 500% 375% 200% 180% 100% Source: Reserve Bank of India Margins to Continue Improving As High-Cost Deposits Reprice And As Loan Demand Improves The margins of banks are likely to continue to be positively impacted by the repricing of high-cost deposits (especially longer-term ones) over the next few quarters. Loan Growth—Averaging 3X Base GDP Growth. Economic data trends have been positive with industrial output increasing nicely. interest rates could also harden. as well as by improved loan demand that allows banks to deploy their resources in better yielding loan assets rather than in investments. The buoyant equity markets may help companies access equity capital and expedite their 38 . Underlying Economic Conditions Improving We expect the outlook for loan disbursements to improve from current levels. Any further tightening of rates in 2H CY10/1HCY11 may also help banks to further improve their net interest margins as their assets would reprice faster than their liabilities. Early Signs of Pickup in Loan Growth Loan growth has seen some pickup recently in conjunction with the festival season (Diwali. Better loan growth is likely to be positive for bank margins and asset quality. We expect further loan growth pickup due to the following factors: 1) working capital requirements are likely to rise on the back of increased industrial activity and rising inflation. however. Couple that with positive WPI (Wholesale Price Index).8 times nominal GDP growth over the past 10 years.INDIA Bank assets in India tend to be comparatively smaller than in other economies.8X Nominal GDP Loan growth in India has averaged about three times base real GDP growth and about 1. and 2) capital expenditure related requirements are likely to increase on account of better confidence levels. Bank NIIs have already seen an improvement with the RBI’s aggressive tightening policy of late. and it is likely to be positive for loan demand. which was in early November).

Revival in Economic Activity and Sentiment—Positive For Bank Earnings The improved economic activity of the past few months could lead to better earnings for banks in the near term through higher loan demand. Better loan demand/ economic activity should also bode well for asset quality in the system. lower levels of fresh NPL slippages and consequently lower credit provisions. driven by demand for food harvesting. festival season and higher industrial activity Better Loan Growth Positive for Bank Margins and NPLs Improved loan demand could also help banks to deploy their excess liquidity in higher yielding assets and thereby enhance margins for the banking system. industrial loan activity generally picks up post the monsoon season (which is typically June through September). 39 . Seasonal Factors Contribute to Loan Demand Improvement In India. We expect the demand for banking sector loans to rise in the near term as capital expenditures are allocated for new projects.INDIA capital expenditure plans.

Federal Bank Fortis. Total premium income has grown at a high CAGR of 25. The number of insurance players has increased from four and eight in life and non-life sectors. as on January 2010. South Africa Sahara Group None Bharti Group AXA Insurance.25% 2. USA Bank of India.3% between 2002–03 and 2008–09.16% 0. Union Bank of India Dai-ichi. UK Bajaj Auto Allianz.8% between 2002–03 and 2008–09.90% 1. OBC HSBC. LIC held 65% market share in terms of new business income collection with the private sector contributing the remaining 35% share in 2009-10. insurers sold 10.65% 0.52 million and private companies 2.20% 0. Japan Mkt Share FY09 71% 6.6 billion in 2008–09. UK Future Group Generali Group. Netherlands Shriram Group Sanlam.22% 1.06% 0. USA Dabur CGU Life. Canada Reliance Group None Max India New York Life. The number of policies issued grew at a CAGR of 12. UK Kotak Mahindra Bank Old Mutual. a high savings rate and increasing life expectancy. With an estimated 100 million people entering the insurable population over the next few years. USA Gujarat Ambuja. Exide ING Insurance.24% 0. strong growth in per capita incomes.13% 0. France IDBI.06% 2. France HDFC Standard Life. USA Tata Group AIG. 40 .90% 0.01% 0.92% 4.14% 0% 0.02% Source: IRDA(Insurance Regulatory and Development Authority Size & Growth on an Upward Trajectory The total Insurance Industry premiums have grown at a CAGR of 25% from 2002–03 to 2008–09 to reach US$52. Enam. UK Aditya Birla Group Sunlife.79% 3.55 million new policies in 2009-10 with LIC selling 8. Germany SBI BNP Paribas.03 million policies. Even assuming life insurance penetration increases from current levels of 4% of GDP to 5% over the next five years implies potential growth of 20% for the industry over this period. the demographics are very supportive of strong growth continuing in the industry.74% 1. Italy Canara Bank. in 2000 to 23 and 22. According to IRDA (the Insurance Regulatory and Development Authority).09% 0. respectively. Asia Pacific Religare AEGON. South Africa J&K Bank Metlife. according to the Life Insurance Council. rising affluence.51% 2. respectively.INDIA Insurance Sector Key Players Company LIC ICICI Prudential Bajaj Allianz SBI Life HDFC Standard Life Birla Sun Life Reliance Max New York Tata AIG Aviva OM Kotal Life Metlife ING Vyasa Shriram Life Sahara Bharti AXA IDBI Fortis Life Future Generali Canara HSBC OBC AEGON Religare Star Union Dai-ichi Indian Promoter Foreign Partner GOI None ICICI Bank Ltd Prudential. Life Insurance: India is the world’s fifth-largest life insurance market with gross written premiums of over $46 billion in 2009 and growing at a CAGR of 25% from FY03-FY09 making it the fastest growing market among the top-ten largest insurance markets. At the end of March 2010.

an average of $157 for Asia. 2. • • The government has raised budgetary support to US$ 28.3 million for life insurance or non-life insurance business At least US$ 416.INDIA General Insurance: As per IRDA data. Capital requirement —paid up equity share capital 1. the general insurance industry recorded 13. This proposal is currently under consideration in the Parliament. must be incorporated under the Companies Act. Per RNCOS estimates. • At least US$ 208. Measured as premiums/GDP. the health insurance premium is expected to grow at a compound annual growth rate (CAGR) of over 25% for the period spanning from FY10 to FY14 accounting for US$ 3 billion in the next three years.33 billion for the health sector during the Eleventh Plan Policy & Regulatory Framework. Regulatory initiatives to promote health insurance include: IRDA has set up a separate department for health insurance.84 billion. Insurance Penetration Expected To Rise Further It is estimated that only 20% of the insurable population (the age group 20-60) has been insured despite the strong industry growth in the past few years.42 million from US$20. We are seeing increased focus by the Insurance companies on building up distribution capabilities in Tier-II and III cities. demographics are very supportive of strong growth continuing in the industry.4% growth in gross premium collected in FY10 with gross premium totaling US$ 7.• It has recommended that the government bring down capital requirements for stand-alone health insurance companies to US$10. A company. With an estimated 100 million people entering the insurable population over the next few years. IRDA was formed by an act of the Indian Parliament (known as the IRDA Act. driven by increasing focus on semi-urban and rural areas given that rural areas remain relatively under-penetrated with only 26% of the population covered in rural areas compared with 50-60% in metropolitan areas. Premium per capita is $40 vs. FDI up to 26% is permitted in the insurance sector. Penetration levels are still lower than other developed countries’. 1956 and possess the certificate of the memorandum of association and articles of association.83 million.7 million for reinsurance business • • International players can operate in India only through a joint venture with a domestic firm and are classified under private sector insurers. Health Insurance: The Indian health insurance market has emerged as a new and lucrative growth avenue for both existing players and new entrants.5% levels over the next couple of years. to operate as an insurance company in India. India’s penetration level for life insurance is at 4% vs. 1999) as the regulatory body to govern the Indian insurance sector. We estimate penetration levels to surpass 4. 41 . • IRDA does not allow foreign reinsurance companies to open branches in India. Fast-progressing medical technology and increasing demand for better healthcare has resulted in rising demand for health insurance. 6-9% for other Asian countries.

7% in 1981 to 25.00% 5. also supports this trend. government-funded retirement programs for its citizens are virtually non-existent. Over the next eight years.00% 2. We believe that over the next few years.00% 1. Therefore.00% 0. Rising incomes and better living conditions have pushed up life expectancy steadily in India. and this is expected to rise further.00% 3. Moreover. The growth of “nuclear” families in urban locations. Expenditures on social protection and health are therefore a lot less when compared to those of most developed countries. more than 100 million individuals will enter the working age of 15 to 65 years. the most recent census. the self-employed or those working for small enterprises are exempt from contributing to the employees’ “provident fund” (similar to the 401(k) plan in the US. Also. penetration of insurance in the country should rise. Only government employees are entitled to pension benefits post-retirement. Life expectancy in India has increased by five years over the past decade to 65 years in 2005-10 and is projected to rise to 73 years by 2025-30. resulting in the breakdown of traditional old-age support structures. the proportion of women in the workforce has been gradually rising from 19. In India. According to the Registrar General of India. investment and overall job growth in the country. the Indian household savings rate of 28% is among the highest globally. 42 .INDIA Exhibit 33: India’s Penetration/GDP levels 6.00% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Non-life Life Source: IRDA Rising Affluence Should Aid Growth The strong economic growth outlook for India should be a key driver for the continued rise in insurance penetration. there will be a continued upward migration among household income levels. This demographic profile also has favorable implications for savings.00% 4. the proportion of women in the workforce is increasing.7% in 2001. The Demographic Profile Is Strongly Supportive Of Insurance Growth India is a relatively young country. it is not surprising that household savings constitute a large 70% portion of gross national savings for India. Further. As the insurable population over the next few years is expected to increase. in which the employer contributes a discretionary match to employee contributions) and need to make their own arrangements for savings and protection cover.

and the industry witnessed a 6% decline in new business premiums in FY09. such as gold and real estate. Greater promoter focus and product development expertise from the foreign joint venture partner. however. Lack of competition has hindered product innovation and market innovation.INDIA Financial literacy should also ensure that Indian households transfer savings from physical assets. such as insurance and pension products. and consequently penetration levels were just 1. the insurance industry changed almost overnight. Private life insurers had better and more marketing and product innovation. Innovating product offerings across different life segments and income levels. The predominance of linked products has also resulted in persistency rates (renewal rates) for many insurers dropping 10-20% on the back of the capital markets’ fall. Private Insurers Continue To Gain Market Share The Indian life insurance industry has been a monopoly of the state sector player LIC. this trend is expected to be extremely beneficial to the life insurance industry. resulting in a wide suite of products and novel product delivery mechanisms. However. the downturn in the capital markets took the sheen off some of these products. With the entry of private players in 2000-01. to financial assets. India’s life insurance industry has experienced a rapid 28% CAGR. private life insurers have been continually taking market share from LIC.4% of GDP even in 1999. In FY09. and which slowed to just 1% in FY09. Over the past eight years. Intensive ramp-up in tied agency business with aggressive marketing strategies. Aggressive growth by the private players has been driven by • • • • • Heavy spending on brand promotions and awareness. The slowdown was particularly severe for private insurers. private insurers now have a 60% share of the new business in the industry. Entry of private players has led to the introduction of innovative product offerings. With the Indian regulator recently capping the fees on these linked products. This growth acceleration was triggered by the entry of private players into the industry and aided by the rising popularity of linked products in a munificent stock market environment. we expect further volatility in insurers’ product portfolios and potentially a compression in their new business margins. Development of alternative distribution channels including bancassurance. and in just ten years since their appearance. LIC has also improved significantly in the face of competition. since nationalization of the industry in 1956. 43 . Combined with an increasing savings rate. which over the past five years had witnessed a 70% CAGR rise in premiums. In recent years.

the number of passenger cars increased at a CAGR of 16%. the rest 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5% 9% 14% 18% 26% 39% 35% 95% 91% Others 86% 82% 74% 61% LIC 65% FY04 FY05 FY06 FY07 FY08 FY09 FY10E Source: IRDA Non-Life Insurance Market In the non-life insurance segment. Between FY03 and FY10. Segments covered in the non-life insurance market include auto. health. fire. 44 . As of January 2010 in the nonlife insurance market. premium income grew at a CAGR of 14% between FY03 and FY09. auto insurance premiums have increased at a CAGR of 22%. The health segment recorded growth of 21. Growth would have been even higher if not for the global macro meltdown in FY09 with FY09 recording just 10% growth. there are 22 players. Public sector companies have a dominant share in the marine insurance segment.INDIA Exhibit 34: Life Insurance Market Share – LIC vs. marine and engineering. out of which 7 are public sector players (including 1 reinsurer) and 15 private sector firms. among others. This trend is likely to continue due to strong growth in the auto segment resulting from an increase in consumer income levels. The non-life insurance sector has witnessed personal/retail line products pick up on the back of increasing income levels and changing lifestyles. Auto insurance had the largest share of 43% in the non-life insurance segment in FY09. Between FY06 and FY10.3% in FY09. A rise in sale of passenger cars continues to fuel demand for auto insurance.

INDIA Exhibit 35: Market Share of Non-Life Insurance in FY09 10. Even assuming life insurance penetration increases from current levels of 4% of GDP to 5% over the next five years. strong growth in per capita incomes. implies potential growth of 20% for the industry over this period. a high savings rate and increasing life expectancy. 45 . With an estimated 100 million people entering the insurable population over the next few years.2 billion in FY01 to US$53 billion in FY10. and India is currently the world’s fifthlargest life insurance market.60% 14% National United India 14% 18% Oriental Others Source: IRDA Structural Growth Drivers Remain Intact Annual industry premiums have grown more than seven-fold over the past decade from US$7. the demographics are very supportive of strong growth continuing in the industry. rising affluence. It is also the fastest-growing market with a growth rate of 25% over FY05-09. albeit aided by the surge in linked products.90% Reliance General 5% 11.30% 12.10% 6.20% IFFCO-Tokio ICICI-Lombard Bajaj Allianz New India 8.

Further. SBI Life has aggressively improved market share by leveraging off its strong brand name and parent’s branch network and now has a 15% share. without 46 . which could result in further growth in the industry and more market share to the private sector. not all players have performed equally well. novel product delivery mechanisms and increased product variety have resulted in penetration levels rising from 2. after government regulators disallowed actuariallyfunded products that contributed to 70% of its premiums. Among these. despite steadily losing share to other private sector entrants in recent years.7% in FY01 to 4. Reliance Life. has been consistently losing market share since FY04 though it significantly improved market share in FY09. there are 21 life insurance companies operating in India. Birla Sun Life.INDIA Exhibit 36: Insurance Premium Growth Trends (In INR Billion) Source: Insurance Regulatory and Development Authority Rising Competitive Intensity Increased marketing. has been steadily growing market share and is targeting to emerge among the three private players in the country. one of the recent entrants. Within the private sector. 100%-owned by the Indian Government. the private sector has consistently taken market share from LIC. Apart from the LIC. over the past three years. As discussed earlier. The competitive intensity in the industry has been steadily increasing with 7 new players in just the past 3 years. Key Challenges High Capital Intensity The insurance business is very capital-intensive.9% in FY09. Bajaj Allianz’s market share has also moderated since it peaked in FY07. The top-six players account for a 75% share. respectively. Max and HDFC Standard Life have maintained steady market shares of 5% and 8%. ICICI Prudential is still the largest. and players have pumped in INR 250 billion until now with additional requirement of INR 70-100 billion in next 3 years. which pioneered ULIPs (unit linked insurance plans) in India. even more competition is expected. if the government raises the foreign direct investment ceiling on investment in a life insurance company from the current 26% to 49%.

We believe that this situation has to correct for long term viability of the sector. While companies have been quick to learn from their mistakes. 47 . FY09 saw the industry contracting by 10% with a few companies shrinking by as much as 33%. which makes the market open to a multitude of unfair practices especially when it comes to selling innovative products in the insurance industry. Lower Productivity A single-minded focus on growth has created lot of excesses in the system. the industry should remain volatile. we believe the unabashed pursuit of growth has put life insurers in a challenging environment such that not all will emerge unscathed. Recovery has not been seen as yet with industry retreating by 3% and private players by more than 15%. High Volatility Increasing dependence on ULIPs has created volatility in new business written. Low Financial Literacy & Unfair Practices Financial literacy in India is very low. This low literacy has led to a very high rate of surrenders/withdrawals in the premature stages of Insurance policies. Although the lag effect of market recovery is yet to be seen.INDIA any taste of profits. The ability of many players to inject more capital is limited. but actuarial innovation seems to find enough loopholes to counter these regulations. India’s Insurance Regulatory and Development Authority (IRDA) had been cracking down on companies to safeguard investors. making it difficult for them to grow. which have led to poor capital efficiency and lower sales productivity for most of the players.

973 $2.636 75.095 667 428 727 666 574 972 22 4 4.6 1.40 $11.629 2.1 120.34 $14.6 4.575 $3.333 490 386 132 60 680 600 321 Book Value 93 63 460 178 299 98 17 111 246 88 P/BV EPS TTM 16 9 102 53 42 11 26 29 61 0 38 0.079 252 86 8.144.00 6.475 $16. Satyam Computer TCS Tech Mahindra Wipro BPO Ticker INR 532281-IN 532129-IN 500209-IN 532819-IN 532517-IN 532254-IN 500376-IN 532540-IN 532755-IN 507685-IN 532927-IN G WNS EXLS 532809-IN Price US$ $9. Current hedging levels are not adequate to protect against sharp rupee appreciation.9 0.913 61.9 2. and consensus is now positive.15 $14.8 2.884 $63.Solu.1 24.5 11. Faster than expected macro recovery and better vendor cost control as well as better revenue visibility and productivity improvements have led to a rise in consensus estimates.425 $13.13 $10.51 $1.877 12. 48 11/24/2009 12/10/2009 12/28/2009 1/13/2010 1/29/2010 2/16/2010 3/3/2010 3/18/2010 4/5/2010 4/20/2010 5/5/2010 5/20/2010 6/7/2010 6/22/2010 7/8/2010 7/23/2010 8/9/2010 8/24/2010 9/9/2010 9/24/2010 10/11/2010 10/26/2010 11/10/2010 11/26/2010 .2 11. however.7 4.268 $558 $633 $2.81 $12.085 15.4 $8.51 $16.4 20 33 0.67 38 17 318 64 2.8 1.4 6.701 20.249 730 551 215 121 1. A pickup in demand from the financial services vertical.7 9. Vishal Info.6 $8.6 1.418 1.0 1297.761 1.0 62.7 13. Exhibit 37: BSE IT Index 6500 6000 5500 5000 4500 4000 Source: FactSet Data Systems IT stocks have rallied sharply on the Indian bourses.60 $0. lower project cancellations and favorable cross-currency movements continue to provide a tailwind for IT stocks.1 $7.49 $0.95 $21.123 501 466 158 64 1.83 $9.5 38.8 99.093 $240 52 Week High Low 455 103 3.6 24.2 30. The BSE IT index is up 40% in the past year. Mindtree Patni Computer Polaris Soft.0 2.321 $4.43 $24. 533011-IN 9.158 500 798 $18.806 $476.453 $18.112 1.96 $69.038 83.049.9 27.46 5.INDIA IT/BPO Services Major Players Company IT Services HCL Technologies Hexaware Tech Infosys Tech.7 4 #N/A #N/A Source: FactSet.3 106. Pricing as of 12/03/2010.41 $1.641 $3.76 $21. Rupee appreciation remains the key risk.71 $15.2 10.1 14.783.9 0 1 P/E 423 88 3. especially for the IT services large caps.6 3.8 9.641 $233.10 Market Capitalization (INR Crore) (US$Mill) 287.883 1.3 19.444 19.Tec.36 $3.836 $396.6 0.39 8.267 $4.7 eClerx Services Genpact WNS Holdings ExlService Holdings Firstsour.

improving customer service or geographic penetration. Corporate-Performance Decline in Key Sectors Bottoms Out There is a bottoming out of declines in corporate performance in key sectors such as BFSI. 11% Energy/Utilities. 5% BFSI. telecom. in our view. the United States contributed 65% of the overall revenue with Europe 31%. Telecom Show Meaningful Rebound. Telecom demand is expected to get a push from emerging markets. telecom. Growth has started to emerge with a rebound in the BFSI market although telecom still continues to lag. 36% Manufacturing. BP has consolidated its vendors by awarding extra work to IBM. 17% Telecom. Infosys and Wipro. Vendor Consolidation and Efficiency Spending To Drive Growth We have seen vendor consolidation and onsite contractor replacement exercises adopted by several large customers.9 billion in 2013 for a CAGR of 6. While BFSI is showing signs of improvement. This spending shift is likely to happen in verticals such as energy and utilities. retail and manufacturing. A similar exercise is being taken by companies such as Chevron. 13% Source: Company Reports and Oppenheimer & Co. retail and manufacturing— contribute about 84% of Indian IT vendors' revenue. this wave of offshoring by companies that have offshore spending of less than 10% of total IT application spending is likely to continue. retail and manufacturing might take longer to recover. retail and manufacturing. which contribute more than 80% to Tier 1 IT firms’ revenue. 18% Retail. Declines Arrested in Manufacturing Four verticals— BFSI. Worldwide Market Overview: Market researchers IDC expect the offshore IT services market to reach $41. as most of these companies have yet to reach an optimal level of offshoring. For example. In 2010. 49 . Exhibit 38: Indian Offshore Sector Revenue (2009) Others.INDIA BFSI. Exxon and a few others. which we believe is likely to result in incremental volume growth for Indian vendors. This includes spending directed towards retaining and growing customers. In our view.2%. Apart from vendor consolidation. media. offshore spending is also picking up in areas where global delivery is required for better business efficiency.

NASSCOM/McKinsey and Oppenheimer estimates put the net savings by outsourcing to Indian IT firms to be in the range of US$20-25 billion in 2009 alone. they are being addressed through strong provider-level initiatives and industry-led programs. particularly the larger players (e. Tier-II/III cities in India offer a still larger benefit.. despite the economic growth and success of these players. leading to the development of world class facilities in select cities. Cost reduction has typically been associated with outsourcing efforts. while the establishment of Software Technology Parks of India (STPI). and communication costs falling continuously.g. Availability of skilled talent has been India’s foremost attraction as a global sourcing country. Talent Supply/Demand Skewed in India’s Favor One of the key drivers in India for growth in outsourcing and offshoring is a mismatch between demand and supply of skilled labor in developed markets. a scale unmatched by any other country. with the addition of 3. there has been a 32% increase in the number of global delivery centers with outreach expanding to 12 new countries. India’s graduate churn-out has more than doubled in the past decade. With entry level salaries in India at around a tenth of those in the US for similar skills. While some gaps in talent suitability exist. and remains a powerful driver of outsourcing. and later Special Economic Zones (SEZs) provided an enabling ecosystem for the industry to flourish. Robust Process Delivery The industry has been extremely quality focused. Infrastructure development has been addressed by both public and private sector. with India based centers accounting for the largest number of quality certifications achieved by any country. The industry has also set standards in the establishment and maintenance of best practices in corporate governance. Stable Business Environment And Infrastructure Timely government policies and increased public/private participation have played a key role in developing an enabling business environment for the Indian IT-BPO sector. wage differentials make it attractive. which has in turn helped the industry reach out to new customer segments and offer new services. Wipro. HCL. Global Footprint Increased focus on global delivery has required the industry to enhance its global footprint. TCS. use of offshore resources versus domestic onsite resources makes a compelling business case for customers of IT services in developed markets. This shift has clearly expanded their brand as more than companies that compete on price alone. and leads in customer satisfaction. the term “offshore” still drives the 50 . India’s strong education framework ensures an ample supply of technical and nontechnical talent. have moved up the value chain of IT services from basic technical support to systems integration and outsourcing. Infosys. However. with Tier-I locations offering savings of ~70%t over source locations.7 million graduates in FY2010. Infosys. India offers the lowest cost of delivery as compared to other offshore locations. Improving Offshore Brand Offshore providers. and Cognizant).INDIA What Does Indian IT-BPO Bring To The Table? Low Cost Of Delivery While geographical mismatch of demand and supply of skilled labor makes offshoring a necessity. Over the last two years.

like the IT services segment. NA and EMEA at 5%. labor-based resources. APAC is expected to grow the fastest at 9. and it remains to be seen how long the captives survive. has predominantly been an export-oriented sector. It is this perception which still is likely limiting offshore providers from gaining top-level recognition as front runners in IT services although we believe this perception is slowly ebbing away. it is expected to experience fourfold growth over the next four years. niche BPO players. Currently worth around $11 B (including captive BPOs). According to trade group NASSCOM. recently we have seen efforts by large financial institutions such as Citigroup to set up their own captive BPOs in India. decision making cycles are shortening. APAC’s lively growth bodes well for BPO players with significant market presence there. We believe this helps them fill gaps in their portfolio and expand to newer customer sets or geographies Captive BPO Outlook We are witnessing mixed signals from the captive BPO market. and deal sizes are creeping up – although they have not reached pre-recession levels. Europe and Asia Pacific. EMEA and Asia Pacific. Market Outlook Improving Recent BPO vendor commentary indicates that client demand for offshore BPO is improving. Worldwide Market for BPOs Worldwide BPO services for 2014 are expected to reach $201B. M&A in the BPO Space There was significant consolidation in the global and regional BPO market in 2009. the BPO industry is estimated to touch revenue figures of $40 billion by 2014 and provide jobs to over two million people.4% vs. In 2010. BPO–Opportunities in India The business process outsourcing industry in India. 51 . with some large M&A deals announced in 2H09. however. Stream merged with eTelecare. Xerox acquired ACS. Sykes acquired ICT group and Dell acquired Perot.INDIA perception of using low-cost. It has derived the bulk of its revenues from the US. While some India BPO vendors in the past have tried to consolidate their presence by taking over entire captive customer setups. While growth is expected to come from all three regions of North America. merger and acquisition activity has been restricted to small. niche buyouts. attrition levels at captive BPO tend to be higher than the overall industry average. Historically. BPO services vendors are acquiring attractively valued.

followed by HR outsourcing. and cloud computing solutions. or software as a service. Development of these new opportunities can triple the current addressable market. Significant opportunities exist in core vertical and geographic segments of BFSI and US. BPO spending in 2010/11 is expected to be increasingly driven by the F&A segment and procurement. and security. and virtualization. Other areas of spending include data management. and can lead to Indian IT-BPO revenues of $225B by 2020. Government IT spending as well continues to rise across the world. retail. largely focusing on infrastructure.4% 2010. healthcare and government respectively. there is tremendous headroom for growth as the current off shoring market is still a small part of the overall outsourcing industry. Outlook We believe the improving economic conditions and a return of consumer confidence and renewal of business growth should drive IT spending going forward. 52 . Even though India has a 51% market share of the offshoring market. We believe key near term drivers for IT services could be SaaS. it is expected to rebound by around 4% in 2010 and close to 5% in 2011. and emerging geographies and vertical markets such as Asia Pacific.2% in 2011 (Gartner).INDIA Exhibit 39: Worldwide BPO Market 250 APAC EMEA America 14% 12% 200 10% 8% 150 6% 4% 100 2% 0% 50 -2% -4% 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -6% Source: IDC Macro made an obvious impact on growth in 2009 with the market declining 5% but according to various third-party market researchers. on-demand ERP. security. IT services is expected to grow by 2. and 4.

we believe that offshore providers need to provide maximum transparency of their companies' financial and business operations. The first group involves increased investment by emerging offshore locations.INDIA Key Sectoral Risks Protectionism The increase in government intervention with private sector industries. the Indian IT services provider admitted to falsifying its finances) appear to have had limited impact on offshore providers. Our current assumption is for wage inflation to rise to the low teens in 2010 as variable compensation has made its way back in to the total compensation mix. The impact on offshore providers will be to utilize more local resources or potentially invest in new delivery models for local use. The second group involves an alternative means of procuring IT services. such as finance and manufacturing. Increased Competition Including New Competition from New Locations Competition in the offshore world is coming from two major groups. we would note that wage inflation should remain under control in the lower teens. This group involves providers offering such IT services as SaaS and cloud/utility computing. is heightening citizen reaction to the use of offshore resources as undermining employment opportunities. These IT services can also be construed as opportunities given the need for deployment and maintenance services. Corporate Credibility The effects of the Satyam debacle (in January 2009. particularly in the United States. and IT offshore providers especially the Tier 1s should continue to benefit on their higher mix of “fresher” employees (that is. which are building up their local capabilities and promoting their abilities to developed markets. employees with less than 3 years’ experience). coupled with rapidly increasing unemployment. 53 . While benign wage inflation’s benefit has abated for the IT sector. The impact of these events is moving governments to consider greater levels of protectionism in Europe and the United States. Wage Inflation Starting to Creep Up Last year’s benign wage inflation due to the weak economic macro environment has given way to rising wage inflation since the beginning of 2010. such as Egypt and China. . However.

666 567 $12.6 37 21 50 14 13 9 23 15 P/E 16. Cadila Health.434 463.8 -11. Market Size India's pharmaceutical industry is now the third-largest in the world in terms of volume and stands 14th in terms of value.75 $8.991 358 $7.5 51.013 $10.481 $68.835 625 375 476 402 520 413 331 1.426 771 441 1.6 6.011 $16.0 Source: FactSet.914 $10. Jubilant Lupin Ticker 506690-IN 532300-IN 500420-IN 524804-IN 532296-IN 532321-IN 500302-IN 500124-IN 500359-IN 500087-IN 524715-IN 530019-IN 500257-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 249 $5. a favorable environment for developing significant new research processes and access to funds from local or regional governments to treat diseases that are generally neglected.6 34.e. These include greater access to the patient population they are trying to serve.5 78.0 8.2 23. Minister of State for Commerce.9 0. the global pharmaceutical majors also enjoy certain other benefits in shifting their R&D operations to countries like India. most Indian companies are still in the early stages of their ramp.097 $102.5 20.63 75. 54 .669 1. Around 45% of total revenue for the Indian pharmaceutical industry comes from exports.9 5 809 600 1. pharmaceutical exports from the country have recorded growth rates of 21.94 $6. India accounts for only 1.0 15 426 115 -22 -16.61 48.669 374 $8.INDIA Pharmaceutical Sector Major Players Company Unichem Labs.9 24 1. According to data published by the Department of Pharmaceuticals.04 billion.1 27.5 12.25%. Cipla Sun Pharma.02 157..035 241.826 574 370 447 288 496 $17.769 92.37% and 28. Export Driven Market Despite having many domestic players. access to indigenous plants known to have huge medicinal potential (but not fully tested or commercialized yet). In addition to cost benefits.458 $4.915 $22.349 786 374 3.8 36.23 $9.051 364 300 280 265 262 97 684 267 129 74 88 144 58 7. respectively.172 $49.0 5.7 billion in 2008-09—a combined annual growth rate (CAGR) of 21.366 297.59 $12.675 $53.033 $35.26 billion Export of pharmaceutical products from India increased from US$ 6.776 221.80 $40.1 -32 606 379 116 4.118 52 Week Book P/BV EPS High Low Value TTM 268 105 62 4.2 134. According to Jyotiraditya M Scindia. Even though combined sales in the US have grown at a steady pace in the past three years (accounting for more than 20% of net sales).1 2.8 4. The Indian pharmaceutical industry also provides a wide range of contract services across the drug development value chain including drug discovery.Inds. 2007-08 and 2008-09. with a 1-2% market share.23 billion in 2006-07 to US$ 5. 14. Wockhardt Torrent Pharma. Pricing as of 12/03/2010.92 billion in 2007-08 and to US$ 8.4 5.30 100.9 20. Ministry of Chemicals and Fertilizers.97 38.4 10 385 230 97 3.3% of the global pharmaceutical market. the total turnover (i.112 45.637 $66.41 $11. Aurobindo Pharma Glenmark Pharma. with the US alone accounting for 20-30% of total revenue.288 $28.164 309.4 42. revenues) of India's pharmaceuticals industry between September 2008 and September 2009 was US$ 21. Of this.53 22. contract manufacturing. Piramal Health Dr Reddy's Labs Ranbaxy Labs.995 $8. in the three consecutive years of 2006-07. clinical trials and data management to foreign multinational companies.54%. A comparison (by the Organization of Pharmaceutical Producers of India) of set-up costs of these facilities in the US vis-à-vis India shows that it is 37% more economical to set up a captive unit in India than in the US. the domestic market was worth US$12.12 $9.61%.060 $20.

due to the huge cost and time benefits. recent cries of protectionism in the US and Europe related to growing concerns of unemployment in various sectors are not so relevant to the pharmaceutical manufacturing industry. The generic drugs imported from India are.3% of the US working population in 2008 compared with healthcare and social assistance services. Low cost. create necessary manufacturing/research facilities and widen portfolio of clients and services reducing concentration risks. 2x the average rate of inflation (source: Kaiser Health Research). With rising healthcare costs in Europe and the US. intermediate and generic drug production to India. high quality Indian manufacturing has become essential for API and intermediate production. The workforce: The pharmaceutical industry in the US and Europe and the manufacturing sector at large in developed countries are not perceived as major job creators due to the high degree of automation in manufacturing. 9. Recent estimates indicate that the average insurance premium for family coverage in the US in 2008 grew at an average rate of 5%.5% in France in 2008. The insurance companies: Around 85% of the US population has health insurance coverage. These multinationals also have a significant say in the governments in these countries. In fact. Indian companies have acquired firms that give them client access. A recent study by the Generic Pharmaceutical Association in the US revealed that the American healthcare system saved US$734 billion between 1999 and 2008 by using generic drugs. A costbenefit analysis of typical manufacturing cost elements between the US and India (by the Department of Pharmaceuticals) illustrates that outsourcing of manufacturing operations to India typically results in net savings of 27%. beneficial to consumers that typically pay a lower health insurance premium for using these drugs.7% in Canada and 9. 55 . The insurance companies would thus benefit from cheaper drugs manufactured in India.INDIA In fact. and consumers accord a high priority to healthcare. cheap generic drugs exported from other countries have proven to be a silver lining. many multi-national pharmaceutical companies in the US and Europe have been increasingly outsourcing API (active pharmaceutical intermediate). Thus. in turn. Indian companies are present in the highest value adding segments— high potency substances in CMOs (contract manufacturing organizations) and discovery research in CROs (contract research organizations).5%. including about US$121 billion in savings in 2008 alone. considering that it currently spends more than US$2 trillion annually on healthcare and subsidizes medicines for the elderly and the poor. which correspondingly employed 12.7% of the GDP in Germany. The government: Cheaper generic drugs are an important factor in the cost cutting plans of the US Government. The pharmaceutical sector is one that has felt a relatively lesser impact of the global financial crisis and the corresponding demand slump following it compared with other manufacturing sectors. Increasing Outsourcing In Research And Manufacturing The environment for outsourcing remains favorable as innovators look to reduce costs and increase the speed of the research process. with private insurance companies and funds accounting for more than 50% of total healthcare expenditure. With India being one of the major sources for manufacturing these cheap generic drugs. Healthcare expenditure generally accounts for a major share in the total spending of developed countries including 10. the pharmaceutical sector employed only 0. the governments in the US and Europe would seemingly want to further promote their imports from India. This is because primary drugs are essential commodities. Clinical trials are increasingly becoming expensive in the developed world.

Besides lower trial costs. out of every 5. Better Margins Growth in India’s CRO business is driven by several factors –1) legacy chemistry skills and synthesis experience over the past several years. clinical development teams.000 screened compounds. CRO—Outlook Globally. and only one eventually is approved by the USFDA. only 250 enter pre-clinical testing. Advantages of Indian Companies in the CMO Space Are: • Cost savings—Indian manufacturing is up to 50% cheaper compared to the US/Europe’s. and 4) high quality of data. Large number of FDA approved plants—India has the largest number of FDA approved plants outside the US. with India having about 8. Existing strong manufacturing base—India has traditionally strong manufacturing skills. World class skills—India scientists have the skills necessary for chemistry-based manufacturing.INDIA CMO Business Most of the Indian companies are operating in the CMO field. The Indian cost advantage has been pegged at 1/6 to 1/3 of the cost of drug development in the West. CROs provide substantial global capacity to drug developers and have become a critical contributor to clinical trial activity.000-10. R&D driven pharma companies are under pressure to reduce R&D costs.5x more than it did 15 years ago. • • • CRO Business—High Barriers To Entry. Global R&D expenditure has grown to ~US$60 billion in 2007. The CRO market size is estimated at US$21 billion in 2009 and expected to grow at 8. and the country is known for generic manufacturing. focused on APIs and intermediates. This is a natural extension of India’s core competency in chemistry-driven manufacturing. Labor costs a fraction of those in the developed world. 3) faster patient recruitment. Of these. medical and therapeutic expertise. Clinical trials conducted by CROs are completed up to 30% more quickly than those conducted in-house by pharma companies. Second-largest pool of qualified medical doctors globally after the US. Manufacturing of commercial scale API and intermediates is shifting to India while early stage manufacturing is still being done in Europe and US. According to PhRMA (the Pharmaceutical Research and Manufacturers of America).5% per year to reach US$ 35 billion by 2015. • • 56 . India—A Popular Destination for CROs Key factors favoring India include: • Large pool of labor with chemistry skills. only five make their way to clinical testing. clients need patient access. 2) English speaking scientists at significantly lower costs than developed markets.5 million qualified scientists with majority if not all of them English speaking. Due to the large number of clinical trials required by USFDA. introducing a new drug now costs 3.

Limited operating history and evolving business models with widespread use of M&A for growth. Exchange rate risk with the volatility of the Indian rupee vs. Increasing competition in India and China. Key risks include: • • • Continuing regulatory compliance necessary to be in the business.INDIA • Diverse patient/gene pool with diverse disease characteristics for clinical trials and a high level of patient consent that reduces time and costs involved in clinical trials. the US dollar. • 57 .

1 21. However.110 59 $1. The FY2011 central government budget allocated Rs31. states have access to Rs 3. free and compulsory education becomes a fundamental right.e. of which 95% are government schools and the balance private schools.9 2 325 150 101 2. PPP Model—More Food Than One Can Chew! The government is involving the private sector in computer training for public school children through ICT.165 241 $5. in addition to the capacity needed to include those outside the school system. Pricing as of 12/03/2010. India has a million schools.1 24 756 334 188 3. government and private bodies believe that growth in school education in India will be very strong.549 52 Week Book P/BV EPS High Low Value TTM 876 442 184 3.091 628 $13.5 billion in coming years..3 Source: FactSet.036 crores for education translating to a 16% increase YoY. Education at all levels remains a key focus for the government.66 54.31 9.36 24.409 $12. approximately 52 million children between ages 6-14 are not enrolled in any school.741 $2.9 32. This is evident from the fact that annual school fees have increased multifold across India.972 $5. This business is growing very fast.4 21. However. i.495 $2. Government data indicate that about 220 million students access the education system with another 100 million out of the system. India—The Largest Education Market In The World A large number of students and schools and the required services across various levels of education make India the largest school education market in the world. In addition.4 11 P/E 24.INDIA Education Sector Major Players Company Educomp Everonn Systems NIIT Core Projects Manipal Education Ticker 532696-IN 532876-IN 500304-IN 512199-IN Private Price Market Capitalization INR US$ (INR Crore) (US$Mill) 570 $12.000 new K-12 schools (or grow the number of schools at present by approximately 20%) within the next five years to cater to the expected increase in the student population.3 29 78 51 31 1. Successive governments continue to emphasize education and to set targets to increase spending on education to 6% of GDP. The “Right to Education Bill 2009” makes it mandatory for government to ensure that all children below 14 years of age are enrolled in schools. Similarly. with enlarged public-private partnerships at every level of the educational pyramid and with targets of nearly half of the spend toward primary and secondary education. Currently.95 9. What Is Driving the Private Education Sector? Increased Propensity To Spend On Quality Education India for decades has seen poor educational standards and inadequate infrastructure. rising income levels have boosted the propensity to spend on education.675 crore for elementary education under the 13th Finance Commission grants for 2010-11. This structural shift is expected to continue for few more years Government Support and Newfound Willingness For Change In Political Circles The Indian Government is supporting the education sector in a larger way by implementing many schemes for basic and technical education through various platforms. new areas can open up 58 . The National Ministry of Education estimates that India needs to build close to 200. This alone will create an additional market of US$ 12.

build school infrastructure. This bodes extremely well for the education sector. at Rs70 billion (US$1. medical. governmental and private focus. which makes this an Rs150 billion market. new education and communication technologies. unlike mainstream schools. We believe the opportunity is much larger. Chate Classes has more than 100 branches all over Maharashtra and up to 50 branches in Mumbai. The dependence on board percentages to secure entry into engineering or medical colleges ensure high growth not only for players like Career Launcher. when globally everything had fallen apart.7 billion). 44% is below the age of 19. we think. there is demand at all education and income levels. Demand for education will continue to increase over next decade at surprising speed. teacher training etc. Of India’s population. Career Launcher. IITs. the education sector in India bucked the trend. paying around Rs15. We believe these changes will trigger demand for educational services and educational infrastructure of an unprecedented nature making education a big business in India and making it one of the leading investment themes. Recession-proof Industry In recessions.INDIA for PPP (public/private partnerships) like private school management of public schools. Last year. More than 5 million children enter playschools in India every year and stay for two years. where profitability typically happens only after five years of operations. We find that spending levels for home based private tutoring are much higher than for classes at coaching centers. The model has been accepted by the political circle and will be focused incrementally on new initiatives. with very respectable business growth The Education Market Shifting demographics. Big private players — such as FIIT JEE. IMS. and Career Point — have nationwide franchise operations.000 in fees per annum. Pre-school—Nascent Opportunity Pre-school education is still a relatively underdeveloped market in India but is likely to see a change in market dynamics in the near future as new players target this space with branded pre-school chains. Structural Story On Favorable Demographics India ranks second in the world in population. making it the youngest nation in the world. Some of the big players have estimated the market potential of organized coaching in India. and Aggarwal Classes but also for private tutors. This is true across the globe and more so in India because of social reasons. typically the last thing to get affected is the education budget. Vidyasagar Classes. for competitive exams alone. This has the potential of creating additional markets for all private players.000-18. and some of these have even started offering coaching to students in the US. We do not find any large national player (like Kaplan or Sylvan in the US) in the school tutoring space as school education varies across India. Tutoring—Fragmented But Large Business Opportunity Supplementary tutoring (designed to supplement large-scale teaching in schools) has come to account for a significant portion of household spending in Indian households. rising student expectations. Career Launcher offers online education to school students from class VIII to class XII of India’s CBSE (Central Board of Secondary Education) and Maharashtra SSC students. Chate Classes. and a host of new players are creating profound and wide-sweeping changes in the Indian education landscape. From board exams to school tuitions. IIMs and now GRE. We note that the economics of this business are very attractive and that a preschool with leased real estate can be a profitable venture from the first year itself. 59 .

000 K-12 schools in the near term for meeting growing education needs. we believe demand for secondary education will continue to rise as returns on secondary and higher education are significantly higher. Private Schooling A Strong Business Opportunity The Indian Education Ministry believes there is a requirement of 200. A recent McKinsey report projects education and recreation spend to capture a larger share of wallet at 6% and 9% in 2015 and 2025. Currently. The patterns of expenditure in rural and urban areas are different. In rural areas.4% of elementary schools are in China's private sector. it rose 10. 20% of pre-schools. and we believe private education spend will continue to rise at much higher pace.INDIA We believe that the emergence of mass private tutoring blurs the distinction between school teaching and supplementary teaching. The average Indian middle-class household spends 1520% of its income on education/careers of its children. private tutoring has made inroads in rural areas as well. from 5% in 2005. despite this supply constraint. The growing dissatisfaction of parents with the formal school system and the criticality of performance in a limited job market drive the need for supplementary education. Over the past two decades. whereas in urban areas. According to the Seventh All India Education Survey. which is much below the level predicted for a country of India's per capita income level. However.1% over 2005-2025 as we see an increase in the purchasing capacity of middle-income group families.5% in 1984. We believe increasing purchasing capacities of mid-income families and higher skill requirements will put tremendous expectations on the school system. Break-even is achieved in three years of operations. Private education spend is growing both in rural and urban India.1% of per capita income in 1983 to 6. expenditures are highest for tuition fees and private coaching fees. education attainment to the secondary level has increased to only 16% in 2004 from 8. However. From being banned until the mid-1980s and with virtually no private schools in China until 1989. Though this continues to be a largely urban phenomenon.3% in 2003. respectively. We note that a new private school reaches maturity in the seventh year. there were only one-fifth as many secondary schools as the number of primary schools. research shows that while per capita expenditure on education rose 12. 9% of vocational high schools. 54% of tertiary institutions. 3% of middle schools and 0. coinciding with peak revenue status in the fifth year of operations. expenses are high for uniforms. private education has grown dramatically since in that nation. books and stationery. India Significantly Lagging In Secondary Education Attainment India is at a big disadvantage to all other three BRIC countries in secondary school enrolment in contrast to primary school participation. We believe private education in India is expected to grow at the pace China saw over the past couple of decades. The gross enrollment rate in secondary education is 47%. Spend on education and recreation is expected to rise at a CAGR of 6. Operating margin for a school in a steady state can reach about 40-50%. 60 .8 times for all income categories taken together. where India has a comparative lead. Perceptible Shift in Mindset Toward Education Spending Private share of spend on education in urban India has grown from 2. both in terms of scale and innovations.4 times between 1983 and 1999 for the poorest 40% of country's population. This demand for education can be explained by the fact that wages are much higher for workers with higher education levels.

momentum has picked up.72 billion) in 2010-11. well-trained teachers. This had been the apparent problem with a few players last year.1 billion) for elementary education under the Thirteenth Finance Commission grants for 2010-11. And the scarcity of infrastructure can leave the opportunity untapped. Lack of Experience for Private Players Private-sector players without much experience in education are venturing into many new areas. 3. This time. There is a fear of margin pressure in general for the sector. This could lead to some avoidable mistakes.INDIA Key Challenges Business Requires Capital Expenditures Those in the business of creating the school infrastructure face limitations on capital available for expanding. will take time to build. reducing the ability to scale up fast to a few players. Balance sheets have become heavy with debt. better content etc.036 crore (US$6.81 billion) in 2009-10 to Rs. 61 .. 31. the Indian Government has declared its intention to revolutionize the system. Increased Competition From Regional Players In Government Business ICT (information and communication technologies) has experienced strong competition from regional players. but how much can be grabbed is a matter of how much can be implemented.800 crore (US$5. and nothing materialized. Budget 2010-11 The Indian Government has increased the planned allocation for school education by 16% from Rs. Momentum May Fizzle In the past. reducing margins in the business for all players.675 crore (US$796. but there always has a risk of this fizzling out halfway. Indian states will have access to Rs. but the talk remained talk. Execution Execution remains a big challenge as the sector is throwing off opportunities. In addition. 26. School ecosystems such as infrastructure.

9 2 P/E 43. leveraged growth and a few casualties. rapid shift from small independent retailers to large.1 Source: FactSet.43 7. free media.0 9 776 320 75 9. After having seen samestore sales decline and overall industry growth dipping to 4-5% in FY09. stood at US$ 194. there will also be opportunities in India's tier II and III cities. Retail Opportunity A recent BMI India Retail Report forecasts that the total retail sales should grow from US$353 billion in 2010 to US$543. Status Check After 3 years of rampant roll-out. Mass grocery retail (MGR) sales in India are forecast to undergo enormous growth over the forecast period. These moves should ease pressure on Indian retailers’ balance sheets.662 65 $1. organized retail is likely to get back to double digit growth in 2009 with bigger players growing faster.69 million. Pricing as of 12/03/2010. in single-brand retail trading.29 billion by 2014.639 52 Week Book P/BV EPS High Low Value TTM 528 323 136 3. This is a consequence of India's dramatic. Indian organized retail is coming back on the right track.6 14 83 41 73 0. Access to key resources like people and property is becoming easier.17 25. BMI further predicts that sales through MGR outlets will increase by 154% to reach US$ 15.479 $5. The cost of doing business is falling. With the expanding middle and upper class consumer base. Organized retail is set to witness the sharpest earnings improvement over the next couple of years. exiting noncore businesses. The greater availability of personal credit and a growing vehicle population to improve mobility also help contribute to retail sales growth of 11.94 87.4 50. Foreign direct investment inflows between April 2000 and April 2010. On the other hand. India continues to be among the most attractive countries for global retailers. according to the Department of Industrial Policy and Promotion (DIPP).2 billion by 2014. retailers are in coursecorrection mode and reducing excesses—closing down nonviable stores and formats. with reduced competitive intensity. Jones Lang LaSalle Meghraj forecasts ~47m sq ft of retail space to operationalize over the next 3 years. ”Mall culture” started in India in the last 4 to 5 years and has created strong 62 . While the cost reduction drive. margin expansion and lower capital requirements improve balance sheet health. etc. even as the sector grew 3x in size between FY06-09 (for a US$18 billion industry). organized retail is back on a growth path with a recovery in consumer sentiment. modern outlets.6 26.306 $19. introduction of international brands and changing lifestyles in urban India.376 $1.INDIA Retail Sector Major Players Company Pantaloon Retail Shopper's Stop Provogue India Ticker 523574-IN 532638-IN 532647-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 402 $8.401 728 $16.4%. cutting down on inventory levels. deteriorating business economics. What Is Driving Indian Modern Retail? Strong Economic Growth Driving Modern Retail India’s consumer mindset has undergone a radical change in the last decade with higher disposable income.

65% depends directly or indirectly on agriculture. We expect 300-600bp of margin improvement for retailers. take pay cuts at the top level. But there are early signs of demand recovery. FDI is presently not allowed in the retail sector. Sustained strong economic growth is leading to changing consumption pattern of India. However. ft. This again provides a latent source of demand for modern retail as aspiration levels and appetite to spend are growing very fast in rural India due to higher agriculture related profits. now that retailers are in the process of rightsizing their operations. Retailers are focused on improving capital efficiency through multiple ways—inventory management. Employee costs are correcting as retailers go bottom-heavy. This cost pressure made retail businesses nonviable. this very fact was considered a big liability. Disciplined Retailers In the low margin retail business. However. managing the cost structure remains the biggest challenge. demand for retail resources has eased. th Rural India Provides Latent Demand Of India’s population. which in turn lead to higher disposable incomes. There were no FDI restrictions in the retail sector prior to 1997. Structural Story On Favorable Demographics India ranks second in the world in population. of retail operations had increased by almost 1. Of the population.INDIA awareness about modern retail. too much competitive clutter in the last few years had created excessive demand for key resources like people and property. anchor retailers are entering into attractive sales-linked rental models. 70% is below 35 years of age. Store traffic is increasing. SSS bottomed out at 4-5% in FY09 and is now showing a positive trend in the last few months. New Emerging Trends In Sector: Demand Revival after a Tough Year Most retailers experienced their worst year ever in 2008-09 (especially given that Indian organized retail is still in its infancy) with changing consumer preferences and general down-trading habits. While lease rentals have corrected by 30-50% from the peak. Until the 20 century. Same store sales growth (SSS) is a good indicator of consumer sentiment. This bodes well for modern retail.5x. While lease rental costs had increased by 70-100%. yet it has turned into a big opportunity especially for the retail market. except through the cash-and-carry wholesale trading route. Entities that 63 . Another factor that gives us comfort in the growth story is job market revival. making it the youngest nation in the world. employee cost per sq. which gives us further confidence in the overall consumption theme. which again is a good indicator of better sentiment. which largely targets these customers with a higher propensity to consume. This had pushed up cost structures multifold. Capital Efficiency—Cut The Flab As external capital becomes scarce. Market/industry researchers expect SSS levels to range between 7-12% over the next 2 years. space rightsizing and cutting down on investments in noncore activities. integrate the support functions and man the staff efficiently at the floor level. retailers are focusing on trimming their balance sheets and funding growth through internal accruals. FDI and its Possible Impact Introduction of foreign direct investment in retail is a hotly debated topic in India these days. The government allowed 51% FDI in ”single brand” retailing three years ago.

too. Moreover. In our opinion. 64 . Considering that Indian retailers do not have deep pockets. before they achieve meaningful stability. In China. This would most likely result in higher employment generation. besides increased competition. This tends to be multiplied in emerging economies. If FDI were to be permitted. The Indian government may relax FDI norms for the retail sector in a phased manner. were allowed to continue with their foreign equity participation. are expected to increase multifold as foreign players start sourcing from Indian markets. Another noteworthy point is that traditional stores have grown along with the modern formats in China. Most retailers have yet to integrate themselves with their suppliers.5% since FDI was permitted in 1992. We have already seen the likes of Wal-Mart tying up with Bharti to have an exposure to the retail segment (via cash-and-carry). so that domestic retailers are given enough time to achieve scale and have a firm structure in place before facing foreign competition. we believe that supply chain investment is likely to lag investment in stores. so that stock replenishment and additions can happen in an organized manner.INDIA were established before 1997. Key Challenges: Inefficient Supply Chain And Logistics Management Most retailers are engaged in retail space expansion. Lack of Experience Customer tastes and preferences are in a constant state of flux. All these activities require significant investment in the supply chain. like Mc Donald’s and Foodworld. Exports. they are committing to faster replacement of merchandise in stores. The boom witnessed in the Chinese retail industry after FDI was permitted is strong evidence in favor of FDI. this underinvestment could become a bottleneck for retailers in coming years if steps to improve the supply chain are not taken. We believe that Indian retailers also need to go through 2 to 3 more business cycles. retail sales have grown at a CAGR of 13. there could be significant investment in the supply chain to meet the needs of increasing scale and maintain efficiencies.

54% for China.6 4 99 66 52 1.9 14 135 75 39 2.6 0 P/E 41.924 $45. 65 .3 Source: FactSet.INDIA Media Sector Major Players Company Zee Entertainment Television Eighteen Sun TV IBN18 BROADCAST NDTV Ticker 505537-IN 532299-IN 532733-IN 532800-IN 532529-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 148 $3.61 13.28 144.4 % Source: Federation of Indian Chambers of Commerce and Industry (FICCI) Arrival of New Delivery Platforms To Drive Faster Growth In Subscription Revenues Subscription revenues are expected to grow at a faster pace than advertising revenues. The Indian television advertising industry is estimated to have achieved a size of Rs.0 % Radio Advertising.155. as a percentage of India’s GDP. will rise going forward.34% for the US.9 36. 48. growing consumerism. increasing disposable income. stands at around 0.82. on the back of the government-mandated transition to conditional access systems (CAS) in cable and the emergence of the direct-to-home (DTH) satellite industry. Low Ad Spend As A Percentage of GDP Promises Huge Growth Potential Total ad spending.5 billion in CY08 and is expected to grow at a CAGR of 13. We believe that India’s ad spend.5 billion by CY13 (source: FICCI—Federation of Indian Chambers of Commerce and Industry). video piracy).4 % Print Advetising.802 $1.158 $2.272 $4.924 520 $11. and changing demographics.5% to Rs.56 204.4 -5 172 85 56 1.289 52 Week Book P/BV EPS High Low Value TTM 162 121 42 3. 1.1 -20. which has been negatively impacting broadcasters for years. which is quite low in comparison to 1.539 94 $2. 6..e.2 Online % Advertising. 41. 3.95% for UK and 0. Exhibit 40: Advertising Spend By Medium Television Advertising.421 $32. as a percentage of the GDP.4 43.08 22.4 2 547 319 48 10. Pricing as of 12/03/2010.7 -310.949 90 $2. on the back of the country’s economic growth. The transition to digital provides a solution to the perennial underdeclaration of subscribers (i. 0% Out of Home Advertising.47%. 0.00 5.094 72 $1.

35 per channel on á la carte basis for cable operators providing service through CAS. and there is intense competition within these segments. such as CAS and DTH. respectively. broadcasters are charging higher subscription fees to DTH operators for providing their channels. which would further cap subscription revenues for broadcasters. and IPTV operators. the TRAI has fixed subscription fees for pay channels at up to Rs.5% and 0.5. However. Hindi News. Such intense competition raises concerns over the business model of new players.8%.2%. both from existing players. the TRAI recently issued a notification stating that broadcasters cannot charge over 50% of the price that they charge cable operators in non-CAS areas. Intense Competition In News Space The news space in both English as well as in Hindi in both general and business categories is witnessing intense competition. and we believe that only those with deep pockets and quality news content will be able to survive.INDIA Merely 10% of subscription revenues reach the broadcaster. Following the failure to come up with any solution on pricing of channels to DTH operators. provides broadcasters with the chance to cash in on the lost opportunity. 0. Subscription Fees Capped by TRAI Broadcasters receive subscription fees from subscribers through cable operators. As per the Telecommunications Regulatory Authority of India's (TRAI’s) notification on interconnection agreements in the CAS notified areas.2%. 66 . as the precise number of subscribers will be revealed. Of the total market. while cable operators pocket the remaining amount. and broadcasters will also command a higher revenue share. The arrival of new delivery platforms. Currently. broadcasters will receive 45% of subscription revenues. The move likely will lead to an increase in the revenue streams for broadcasters. as well as new satellite channels being launched. Any further intervention could lead to more price control by the TRAI. DTH operators. English News and English Business News command a viewership share of 3. 0. Hindi Business News. while multisystem operators (MSOs) will receive 30% and local cable operators (LCOs) will receive 25%.

Exhibit 41: BSE Auto Sector 11000 10500 10000 9500 9000 8500 8000 7500 7000 6500 6000 11/24/2009 12/10/2009 12/28/2009 1/13/2010 1/29/2010 2/16/2010 3/3/2010 3/18/2010 4/5/2010 4/20/2010 5/5/2010 5/20/2010 6/7/2010 6/22/2010 7/8/2010 7/23/2010 8/9/2010 8/24/2010 9/9/2010 9/24/2010 10/11/2010 10/26/2010 11/10/2010 11/26/2010 Source: Factset Data Systems and Oppenheimer & Co 67 .864 1.917 $81. the BSE Auto Sector is up a whopping 355%.565 $102.0 59 1.0 44 826 475 180 4.832 $40.5 27.8 27. the sector is up 51%.387 $89.1 26.158 73 $1.315 $29.6 Source: FactSet.767 170 $3.2 28.497 223 8.648 1.171 422 3.350 645 220 6.954 $1.61 96.5 3 437 211 141 2.78 144.9 22.708 799 $17. Since then.6 6 82 46 30 2.22 750.663 810 94 17.3 86 2.583 $21.463 411 $9.72 365.188 $166.4 36 180 102 23 7. Over the past 12 months.713 $32.2 64 1.48 461. Pricing as of 12/03/2010.INDIA Auto Sector Major Players Company Maruti Suzuki Hero Honda Bajaj Auto Tata Motors Mahindra & Mahindra Exide Industries Ashok Leyland Swaraj Mazda Ticker 532500-IN 500182-IN 532977-IN 500570-IN 500520-IN 500086-IN 500477-IN 505192-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 1.10 404.9 15 P/E 16.315 1.094 1. Auto sector stocks have recorded the most impressive return performance since the Indian market indices bottomed in March 2009.7 22.323 52 Week Book P/BV EPS High Low Value TTM 1.75 439.400 $31.1 29.14 5.570 1.596 $35.949 $97.

which in turn impacted overall sales growth for the industry. During 2HFY09. 76. 91 in Brazil and 46 in Thailand (source: KPMG).000 people in India as opposed to 202 cars per 1.23% Three Wheelers. Oppenheimer & Co Ownership Density Portends Strong Visibility and Growth The uniquely strong visibility of India’s auto sector earnings outlook versus that of global sector peers is best illustrated by the country’s light auto ownership density.000 people in Malaysia. Oppenheimer & Co Exhibit 43: Auto Sales Trends FY03-FY10 14000000 12000000 10000000 8000000 6000000 4000000 2000000 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Passenger Vehicles Commercial Vehicles Three Wheelers Two Wheelers Source: SIAM. financed sales in the passenger car segment play a vital role as ~70% of sales done are on credit basis. 68 .32% Two Wheelers. As a result. banks lowered the cost of financing and started providing various schemes for passenger car buyers. 15. the potential for continued volume growth is immense. 4. barring substantial infrastructure bottlenecks. 186 in Korea. on-credit car sales fell sharply. For example: there are only 7 cars per 1. the RBI started lowering key policy rates and reserve ratios in order to lower the cost of funds and to infuse liquidity into the system. We believe this to be one of the factors that contributed to the strong growth in demand for passenger cars over the past year. At the same time.INDIA Exhibit 42: Auto Market Share 2009-2010 Passenger Vehicles. Accordingly.86% Commercial Vehicles.58% Source: SIAM. Cost of Financing Expected To Move North In India. 3.

India’s minister of road transport and highways. 69 . Limited market size leading to lack of scale for new entrants. While we don’t believe 20 kms per day is a realistic target. Honda. Tata Motors. Most of these automakers already have the capacity in place.INDIA Seasonality Very Evident Seasonality plays a strong role in the auto sector especially for passenger auto and 2wheeler sales. given the long lead time nature of the industry. we have seen global auto majors such as Volkswagen. driven by improving economic fundamentals. even 10km per day would be vast improvement over the 4km per day average between 2004-09. and Ford entering the Indian market. Toyota. Global Majors Excited About India Global auto manufacturers remain upbeat about the Indian auto market’s potential and are bringing out more relevant products in the compact segment for the Indian market over the next couple of years. BMW. Hyundai. Homegrown automakers such as Maruti. Industry passenger vehicle sales (cars plus UVs. A strong road network and infrastructure are essential for the auto industry to maintain its growth momentum. With over 200 million households and rising income levels. Mahindra and Hyundai likely will continue to operate at much higher utilization levels than newer entrants. or utility vehicles) are expected to show strong growth. high import tariffs and differential tax structure all serve to keep barriers to entry high. Stock-building ahead of the festival season and easy year-ago comparisons also help. lower finance rates and new products. the compact segment likely will remain dominant and could surpass China’s compact market. Government Initiatives on Road Buildout Help Kamal Nath. Potential Market Size Too Tempting to Ignore Despite excise constraints. Achieving higher “indigenization” (local content) levels is seemingly the key to gain market share in the Indian market. existence of strong homegrown players. has indicated in the past that the government remains focused on road building with a target of 20 kilometers a day. easier availability of finance. India is a difficult market to ignore. Domestic Players Better Positioned Than New Entrants We don’t expect to see major shifts in the industry’s competitive structure over the next one to two years. With over 50% of vehicle buyers being first-time buyers. India remains one of the least competitive automotive markets. given the employment potential arising from it and associated benefits to semi-urban and rural areas that fall in-between connected major cities.

0 Source: FactSet. Pro-Reform Government—A Positive for Infrastructure Post March-2009 lows. the lack of liquidity and as a result the increased cost of debt proved to be a detriment for infrastructure projects.218.423 $270. We believe the presence of a stable government led by the incumbent UPA party is a key positive for the infrastructure sector in the longer term. ~70% of the investment is expected to come from government spending.3 0 226 81 91 1.4 47.35 35.6 19 75 41 15 4.020 $44. Pricing as of 12/03/2010.761 331 $7. per the RBI.8 47 2.705 2. infrastructure stocks have far outpaced the rise in the Sensex in some cases by more than twice that. Lack of liquidity affected project returns and viability. government stimulus packages announced 70 .10 1.8 73 500 304 210 1. Strains on India’s infrastructure include • • • Power demand shortfall.6 61.38 149.371 349 5. sector visibility remains promising with the government outlining close to th US$500 billion in Infrastructure spending in its 11 Five-Year Plan (2007-2012). Infrastructure investments in the th 11th Five Year Plan are expected to be around ~US$ 500 billion (twice that of the 10 plan) with an emphasis on areas like roads.210 $49.081.2 1 74 41 21 2.645 $33. and accelerate the time line for project approvals through simplification of procedures.3 8 2.298 $65.08 189. which tend to be capital intensive.254 49 $1.671 $7.26 294. power.212 1.4 27.5 2 P/E 16.152 $7. with the Central Government contributing ~37% and state governments ~33%. The government aims to increase infrastructure spending to over 9% of GDP by 2014 from the current 5.2 10 185 96 17 8. Liquidity Drought in FY09 In FY09.8 17. India’s Growth Leading to Infrastructural Strains India’s rapid economic growth over the last few years has put heavy stress on the nation's infrastructure.060 325 6. with most of the impetus stemming from the favorable election results.693 $240.INDIA Infrastructure Sector Major Players Company IVRCL BHEL Larsen & Toubro Patel Engineering Lanco Infratech GMR Infra Punj Lloyd Mundra Ports Ticker 530773-IN 500103-IN 500510-IN 531120-IN 532778-IN 532754-IN 532693-IN 532921-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 130 $2.082 106 $2.89 34.127 $5. Additionally.812 147 $3.695 2.400 52 Week Book P/BV EPS High Low Value TTM 198 110 101 1. Underdeveloped roads. With the private sector expected to invest ~30% of projected expenditures.8%. Capacity constraints on port traffic leading to bottlenecks at the ports.36 23.89 1.7 69. the public-private-partnership model should gain traction.376 2. We believe further expansion in key areas could put a heavy strain on the already overburdened lines of transportation unless massive programs of expansion and modernization are put in place.3 10.139 62 $1. eliminate policy bottlenecks. However.1 1216. Investors likely have marked up the stocks in the hope that the unencumbered pro-reform government in place could boost spending on infrastructure. Per the plan outline. irrigation and water supply.367 $42.

~30% is expected from private participation as against 20% in the 10th plan. covering about 2762 kms along two corridors.000 kilometers of roads every year (20 km per day). In FY09. The Indian Ministry of Railways plans to construct a new Dedicated Freight Corridor (DFC). thereby injecting liquidity into the system. Monetary Measures Injected Liquidity Into The Banking system Since October 2008.562B (close to US$500B at the time). the government is looking to involve private investment in some segments of the project. the RBI has reduced the cash reserve ratio (CRR) for banks by 400bps to 5% and has lowered the statutory liquidity ratio (SLR) by 100bps to 24%. along with interlinking of the two corridors at Khurja.INDIA early this year (FY10). It also reduced repo rates by 425bps to 4. One-third of Planned Investment to Come From Private Sector Of the 11th Plan’s investment of Rs 20.618 billion (US$57 billion). but the fact that the focus remains on road buildout and improving the condition of existing roads is a positive. 2. coupled with RBI monetary measures. an increase in productivity and a reduction in unit transportation cost are the focus areas for the project. we expect greater participation from the private sector and the process of project awards to be expedited. These aggressive measures led to a significant improvement in the liquidity situation with wholesale interest rates declining sharply over the last nine months.100 million tonnes by the end of 11th Five Year Plan. The role of private players is much more prominent in current central projects. however. With an estimated cost of Rs 500 billion (US$11 billion).75%. • Road Development We welcome the government’s recent efforts to increase spending on roads. or a doubling of the 10th plan expenditure. from Jawahar Lal Nehru Port. with a total route length of 63. Railways The Indian Railways hold the distinction of being the world’s second-largest rail network and the principal mode of transportation for bulk freight and long distance passenger traffic. We believe the ministry’s road building targets to be a bit too optimistic. 71 . Softening of commodity prices. Now. and the Western Corridor. Upgrading transportation technology. A softer interest rate regime leading to easier access to liquidity and a lower cost of debt. The power and road segments in particular witnessed a sharp slowdown as a mix of macro and sector specific constraints induced a sharp deceleration in private participation for new project tenders. freight traffic is projected to cross 1. Key Opportunities for Private Players Development of the Freight Corridor is the biggest opportunity in the sector. given the following: • • A marked improvement in the Indian economy along with reviving global macro. the severe liquidity crisis hampered the ability of private players to generate funds required for investment.000 kms. The total investment earmarked for the Railways in the 11th Five –year plan is Rs. have alleviated liquidity concerns to a great extent. the Eastern Corridor from Ludhiana to Haldia. The DFC has been further necessitated by growth of 8 to 11% in railway freight traffic over the last three years. Mumbai to Tughlakabad/Dadri. The Transportation Ministry is targeting building 7.

72 . We believe the following prevailing factors to be positives for the sector: • • • • Healthy liquidity conditions. development of airspace capacity enhancement. the rapid growth of manufacturing and realization of demand suppressed due to load-shedding. Power India is among the world’s largest power-producing and -consuming nations. and development of IT. the major ports handle ~75% of India’s maritime cargo. During the 11th plan. upgrades of technology from ground-based communication.9%. not just at peak demand levels but also at the base level. The Ministry of Power has projected annual growth of 9% in electricity demand over the 11th Plan period and has thus set itself a target of augmenting India’s capacity by 78.1 billion) has been earmarked for ports in the 11th plan. 32% of Infra Spending Earmarked For Power Sector Power is clearly the focus area of the government with ~32% of budgeted infrastructure spending earmarked for the sector.323MW as of June 2009. The planned outlay for power has been doubled in the 11th plan period to Rs 6.4mt of cargo per annum by 2010. installation of safety and facilitation equipment. and peak shortfall ~12%. India’s civil aviation market has grown at a CAGR of 18%. the Airports Authority of India (AAI) will undertake the development of 35 non-metro airports and 13 other airports. With healthy economic growth expected to continue over the next few years. infrastructure augmentation especially in the power sector is imperative. Lower interest rates.3% and states 33.6 billion in 2008.INDIA Airports Air passenger growth in India has been one of the highest in the world. Collectively. Softening commodity prices. reaching US$5. Investment of Rs 880 billion (US$19. The key drivers of increasing demand are growth in household consumption. Ports Close to 95% of the volume and 70% by value of the country’s international trade is conducted through its 12 major and 187 minor/intermediate (non-major) ports. Healthy political climate. Investment of Rs 310 Billion in 11th Plan Period The Financing Plan for Airports has estimated an investment of ~Rs 400 billion (US$8.700MW. electrification of rural areas. and surveillance-air traffic management (CNS-ATM) to satellite-based CNS-ATM facilities. installation of new facilities including security equipment at various airports. Severe Demand–supply Mismatch India has been facing a demand–supply mismatch. with the central government expected to contribute 38. India’s power supply capability has always lagged behind its power demands with current total shortfall of ~8%.7 billion) over 2005–14. navigation. given that the sector tends to be capital intensive.665 billion (US$145 billion). with a total generation capacity of 150. The Centre for Asia Pacific Aviation (CAPA) has forecast a market of more than 100 million passengers along with ~3.

241 45 $1.92 1.6 65 37 5 7.762 257 $5.11 68. Surprisingly. The entry of low-cost carriers (LCCs) transformed the marketplace in 2005. The growth of LCCs. The entire travel ecosystem in India.5 10 25.056 $457 95 $2.808 136 $3. hotel. which have now grown from just a single one back in 2004 to seven in 2010.INDIA Travel Sector Major Players Company Cox & Kings Thomas Cook Indian Hotels Hotel Leela Venture Taj GVK Hotels Advani Hotels Pride Hotels Lemontree Hotels MMYT Yatra Cleartrip Via Ticker 533144-BOM 500413-IN 500850-IN 500193-IN 532390-IN 523269-IN Private Private MMYT Private Private Private International Travel House500213-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 528 $11. As consumers navigate online travel sites.7 118 85 34 2. the first real online catalyst came from the government-owned Indian railways which started offering online bookings back in 2005. 73 .1 0 #DIV/0! 79 56 325 0.01 17.2 1 55.8 10 4. The India travel ecosystem consists of various industry suppliers.509 $1. distributors and agencies.1 601.7 10 13.02 8.026 $8.5 179 115 49 2. Pricing as of 12/03/2010.585 $15. and rail is seeing innovation. OTAs.9 316 113 104 2.73 36. they dive into the online travel ecosystem. India’s Travel Market As recently as the mid1990s.6 10 4.8 10 9.006 59 $1.4 #N/A #N/A Source: FactSet.260 $27. there are a growing number of online choices for consumers including supplier websites and online travel agencies (OTAs). the Indian aviation and rail industries were government owned monopolies. bus.72 2.918 $426 52 Week Book P/BV EPS P/E High Low Value TTM 660 304 171 3.891 42 $0.134 $3. have also given a major boost to the online travel market.99 $955 $42. While a majority of travel booking in India today is done the traditional way offline through a retail travel outlet. including air.30 12. real-time basis.5 59 40 54 0.88 $20.2 1. The fragmented nature of the travel industry has created an opportunity for distributors to capture value by developing and managing efficient systems that are capable of bridging travel supply and demand on a nationwide.431 $2.75 2.

the contribution of travel & tourism to GDP is expected to rise from 8. 26. Real GDP growth for the travel & tourism section of the economy is expected to be 6. India is one of the fastest-growing countries in the world in terms of its travel and tourism industry. the WTTC expects that.60% IndiGo.3 0% Spicejet. over the next 10 years.INDIA Exhibit 44: LCCs as a Percentage of India’s Airline Mix Source: TRAI Exhibit 45: India Domestic Airline Market Share July 2010 Paramount. 17.6% (Rs.18544billion. 0. Internet penetration levels remain abysmally low in India with current estimates putting it at a mere 7% (81 million users). According to the World Travel & Tourism Council (WTTC). 20% NACIL.5% per annum over the coming 10 years. 13. 74 .20 % Jet Airways. 16.30% Source: TRAI The Indian travel and tourism industry is large and growing rapidly.60% Go Air. or US$330billion) by 2020.90% Kingfisher.0% (Rs. as a result of the strong growth rate in the Indian travel and tourism industry. 5. India will become one of the top 10 travel and tourism markets in the world in terms of the absolute size of its market. Further.5532 billion. or US$118billion) in 2010 to 9.7% in 2010 and to average 8.

However. air ticket bookings contributed to approximately 70% of the online travel market in India in 2009. including Mumbai. Netscribes has cited sources stating that. An expenditure budget of Rs. Online rail revenues grew in excess of 25% in 2008-2009.INDIA Exhibit 46: Travel and Tourism GDP in 2020 1000 900 800 700 600 500 917 400 300 501 200 100 0 216 148 143 124 122 111 104 80 Source: WTTC According to PhoCusWright.7 billion has been earmarked for building new infrastructure facilities such as tourist reception centers and refurbishing monuments. Hyderabad and Bangalore. Many travelers also utilize online travel agency websites for travel-related research and information. Upgrade of existing or construction of new airports in major cities. Finland. Support of an “open-skies” policy in India which has led to the rise in LCCs. the non-air ticket segments are also growing in the Indian online travel market. The provision of one-month tourist visas on arrival for citizens of five countries (Japan. New Zealand. Chennai. The Government of India has also recognized the importance of the travel and tourism industry and has over the past several years enacted or announced several initiatives to give further impetus to the industry: • The “Incredible India” campaign helps showcase India as a leading tourist destination globally. Singapore and Luxembourg). in 2009.7% increase over the previous year) of which about Rs. Per PhoCusWright. 11.4 billion in 2009. Delhi. the Indian online travel market grew 11% to reach $3. approximately 34% of air tickets and 14% of train tickets booked in India were sold online. • • • • 75 .2 billion allocated to the Ministry of Tourism in the 2010 Indian government budget (a 9. 4.

Goa. While the emergence of the Internet has added additional channels for travel fulfillment. Cochin. Travel Distribution Channels in India OTAs in India: PhoCusWright estimates that the total “business-to-customer” online travel agency market (i. Cleartrip and Travelguru (which was acquired by Travelocity in August 2009). we believe. and travel research sites that have search functionality. Mumbai.. Udaipur. penetration remains low due to the nascent nature of this channel. which in turn distribute the products and services to travelers. Meta Travel Search Engines: These are online travel search sites such as Ixigo. supplier reservation centers and ticket offices remain the largest distribution channels for travel in India. Jodhpur. businesses serving end consumers with travel products and/or services through an online channel) in India is valued at $1 billion and is dominated by four players—MakeMyTrip. these suppliers relied largely on traditional GDS (global distribution systems) to connect their inventory of products and services with travel agencies.e. followed by Yatra at 24% and Cleartrip at 18%. 76 . Ezeego1. based on gross bookings for 2009.com. and we believe OTAs can capitalize on the opportunities presented by this Asian behemoth. Historically. Supplier Websites: Recently. Many travel suppliers such as airlines and hotel companies have their own branded websites to drive business Traditional Travel Agencies: Traditional retail travel agencies.INDIA • The construction of international convention centers in cities including Delhi. at the top of the travel distribution value chain are suppliers that seek cost-effective ways to reach end-user travelers. growth in the LCC market and a highly fragment lodging industry. travel suppliers have begun to utilize other forms of distribution. such as TripAdvisor (Expedia owned). is poised for growth given a strong domestic economy. Travel Suppliers: Generally. Yatra. MakeMyTrip commands a market share of 48%. Agra and Jaipur to attract more business travelers to India. including direct distribution via their own websites. Zoomtra and Kayak. Government spending is evident on airports and roads. and Air transportation policies permitting airlines in India which have been in operation on domestic routes for over five years to fly on international routes • The Indian travel market. Of these.

but we believe rising occupancies could now boost revenues and profits. Rising disposable incomes. 18% MakeMyTrip. the ICC Cricket World Cup in 2011 and Formula 1 in 2011 with India’s hosting its First formula 1 race in Chennai should help in boosting India’s profile as a tourist destination worldwide and should attract both domestic and foreign tourists. 10% Cleartrip. the “Incredible India” campaign and the recently launched ADB campaign should improve the outlook for tourist arrivals in key destinations both from overseas and domestic tourists. 24% Source: PhocusWright & Oppenheimer & Co Hotel Industry FY10 was a challenging year for the hotel industry. cheaper airfares and better connectivity should continue to increase demand for rooms. 77 . The positive outlook of strong GDP growth.INDIA Exhibit 47: OTA Market Share in India as of 2009 Others. Current growth of the Indian hospitality sector is 12% and according to PhocusWright expected to rise to at least 20% over the next few years. 48% Yatra. improving infrastructure. Major sporting events such as the recently concluded Commonwealth Games in Delhi.

Not Rated) Cipla (500087-IN.5.4.8. Rs. $145. 59. Not Rated) Aurobindo Pharma (524804-IN.8. Not Rated) Dr Reddy's Labs (500124-IN. Not Rated) HCL Technologies (532281-IN.6. 1. Rs.INDIA Stock prices of other companies mentioned in this report (as of 12/03/2010) Aditya Birla Nuvo (500303-IN. Rs.9. Rs. Not Rated) ExlService Holdings (EXLS.288. Rs. Not Rated) Hexaware Tech (532129-IN.6. 155. Rs. 726.4. Not Rated) IDBI Bank (500116-IN.392. 160. Not Rated) Lupin (500257-IN.60. 2. Rs. Not Rated) Pantaloon Retail (523574-IN. 1. Rs.2. 728. Not Rated) Cadila Health. Not Rated) BMW (BMW-ETR. Rs. Rs. Rs. 168. 1.0.9. 41. Rs. Rs.8. Not Rated) Educomp (532696-IN. 500. 496. Not Rated) Lanco Infratech (532778-IN.20. 21.5. $63.2. Rs.0. Rs. $14. 569.9.7. Not Rated) Bank of India (532149-IN. Rs. Not Rated) Hyundai (005380-KRX.4. 485.832. 93. 129.69. Rs.5. Not Rated) ICICI Bank (532174-IN.7. Rs. 2. 291. Not Rated) Core Projects (512199-IN.5. Not Rated) IOB (532388-IN. Rs.2. Not Rated) HDFC Bank (500180-IN. Not Rated) Canara Bank (532483-IN.4.0. Not Rated) NIIT (500304-IN. Rs.7. $16.9. 1.6.0. Not Rated) Genpact (G. Rs. Rs. Rs.5. Not Rated) 78 . Rs.1.0.596. Rs. Not Rated) Exide Industries (500086-IN. Rs. Rs. 72. 745.5. Not Rated) Honda (HMC. 1. Not Rated) GMR Infrastructure (532754-IN. Rs. Not Rated) IBN18 BROADCAST (532800-IN.0. Rs.Solu. Rs. 149. (532321-IN. 1. Not Rated) Max India (500271-IN. Not Rated) Larsen & Toubro (500510-IN.80. 770. Not Rated) Cox & Kings (533144-BOM.3. $38. 370. Rs. 170. Not Rated) Mindtree (532819-IN. Not Rated) Ford (F.399. Not Rated) Mahindra & Mahindra (500520-IN.43.209.81. Rs. Rs. Not Rated) Ashok Leyland (500477-IN. Not Rated) IVRCL (530773-IN. Not Rated) Axis Bank (532215-IN. Not Rated) Bajaj Auto (532977-IN. 1. Not Rated) Hero Honda (500182-IN. Rs.4.4. Rs.7. Not Rated) Mundra Ports (532921-IN. Rs. (532296-IN. Not Rated) eClerx Services (532927-IN. (532809-IN. Not Rated) NDTV (532529-IN. 62. Not Rated) BHEL (500103-IN. 146. Rs. $21. 88. Rs.826. 48. Rs. Rs. Not Rated) Hotel Leela Venture (500193-IN. Rs. Not Rated) International Travel House (500213-IN. Rs. Rs.7.7.020. Not Rated) Jubilant (530019-IN.3. Not Rated) Everonn Systems (532876-IN. 90. Rs. Not Rated) Advani Hotels (523269-IN. 241. Rs. 798.409. 480.5. Not Rated) Indian Hotels (500850-IN. Not Rated) Andhra Bank (532418-IN. Not Rated) Maruti Suzuki (532500-IN. 257. 423. Rs.2. 94.8.0. Not Rated) Kotak Mahindra Bank (500247-IN. 527. 628. 373. Not Rated) Glenmark Pharma.6.7. Rs.6.182. 402. 2. 288. Not Rated) Firstsour. Not Rated) IndusInd Bank (532187-IN.8. Rs. 45.

071.0. 331.272. Rs. 727. Rs. 330. Not Rated) Polaris Soft.5. 3. $12.5. Not Rated) Punj Lloyd (532693-IN. Not Rated) Taj GVK Hotels (532390-IN.9. Not Rated) Unichem Labs. 520. Rs. Rs. Rs. Rs. Not Rated) Reliance Capital (500111-IN. Not Rated) Piramal Health (500302-IN. Not Rated) Tata Motors (500570-IN. Not Rated) Sun TV (532733-IN. 135.5.Tec.7.4. (533011-IN.3. 136. Rs. Not Rated) Vishal Info.9. Not Rated) Television Eighteen (532299-IN.314.5. Rs. Not Rated) Shopper's Stop (532638-IN. Rs.9.7. 1. Rs.2.5.2.7.095. 466. 441. 105.1. 573. $79.76. 567.8. 411. 64. Rs.5.4. Not Rated) Source for p. Not Rated) Wipro (507685-IN. (524715-IN. 4.0.3.1. 79 . Rs. 147.7. 708. 248. Rs. 1. Rs. Not Rated) SBI (500112-IN. Inc.INDIA Patel Engineering (531120-IN. 447.05. Rs. 157. Not Rated) Tech Mahindra (532755-IN. (506690-IN. 72. (532254-IN. Not Rated) Torrent Pharma.4. Not Rated) Zee Entertainment (505537-IN. Not Rated) TCS (532540-IN.80.5. Rs. (500359-IN. Not Rated) Wockhardt (532300-IN. 358. Rs. Rs. Rs. Not Rated) Provogue India (532647-IN. Rs. (500420-IN. Rs. $114.8. Rs. 58. Not Rated) Toyota Motors (TM. Not Rated) Volkswagen (VOW-ETR. Not Rated) Patni Computer (532517-IN. Rs.Inds. 1. Rs. Not Rated) Thomas Cook (500413-IN. Rs. Not Rated) Swaraj Mazda (505192-IN. 2 photo: Oppenheimer & Co. 667. 428. 64. Not Rated) WNS Holdings (WNS. Rs. Not Rated) Satyam Computer (500376-IN.2. Rs. Rs. Rs.3. Not Rated) Sun Pharma. Not Rated) Ranbaxy Labs. Not Rated) PNB (532461-IN. Not Rated) Yes Bank (532648-IN. Not Rated) Syndicate Bank (532276-IN.

related securities or in options. are compensated from revenues generated by the firm including the Oppenheimer & Co. 27. Oppenheimer & Co. generally prohibits any research analyst from serving as an officer. Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by Oppenheimer & Co. PERFORM) Rating and Price Target History for: Infosys Technologies Limited (INFY) as of 12-03-2010 01/14/08 I:O:$60 03/17/08 P:NA 75 60 45 30 15 0 2008 2009 2010 2011 Created by BlueMatrix 80 . Research analysts do not receive compensation based upon revenues from specific investment banking transactions. or will be directly or indirectly related to the specific recommendations or views contained in this research report. Inc. Inc.INDIA Important Disclosures and Certifications Analyst Certification . In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report. Oppenheimer & Co.48. Additionally. 69.The author certifies that no part of his/her compensation was. Inc: Stock Prices as of December 7. as well as more specific disclosures set forth below. Potential Conflicts of Interest: Equity research analysts employed by Oppenheimer & Co. Inc.Nasdaq.The author certifies that this research report accurately states his/her personal views about the subject securities. may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein. 69. which are reflected in the ratings as well as in the substance of this report.Nasdaq. OUTPERFORM) MakeMyTrip Limited (MMYT . Oppenheimer & Co. Investment Banking Department. is.OTC. Inc.37. generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. director or advisory board member of a company that such analyst covers. Recipients of this report are advised that any or all of the foregoing arrangements. 2010 Infosys Technologies Limited (INFY . may at times give rise to potential conflicts of interest. PERFORM) Cognizant Technology Solutions (CTSH . Inc. futures or other derivative instruments based thereon.80.

to 18-.to. New York. Attention: Equity Research Department. 2004. Oppenheimer & Co. Inc. 12-. For more information about target price histories. Prior to March 30. 2008: Outperform(O) . NY 10017. please write to Oppenheimer & Co. Rating System as of January 14th. 12. Inc.. Inc.18-month period. used 6-. 300 Madison Avenue.Stock expected to outperform the S&P 500 within the next 12-18 months. 81 .to 24-month price targets and ranges. Oppenheimer & Co. Business Manager. and 12.INDIA Rating and Price Target History for: Cognizant Technology Solutions (CTSH) as of 12-03-2010 01/14/08 I:O:$50 05/08/08 O:$45 11/05/08 O:$35 02/10/09 O:$33 08/04/09 O:$40 10/27/09 O:$45 01/28/10 O:$50 04/26/10 O:$58 08/03/10 O:$67 09/21/10 O:$70 12/01/10 O:$75 75 60 45 30 15 0 2008 2009 2010 2011 Created by BlueMatrix Rating and Price Target History for: MakeMyTrip Limited (MMYT) as of 12-03-2010 09/23/10 I:P:NA 45 40 35 30 25 20 2008 2009 2010 2011 Created by BlueMatrix All price targets displayed in the chart above are for a 12.

10 2. hold and sell recommendations.Stock expected to perform in line with the S&P 500 within the next 12-18 months.50 47. and/or a total return of 10% including dividend payments. for the purposes of complying with FINRA rules. expects to receive or intends to seek compensation for investment banking services in the next 3 months from MMYT. Inc.75 Although the investment recommendations within the three-tiered. In the past 12 months Oppenheimer & Co.Stock expected to underperform the S&P 500 within the next 12-18 months.Oppenheimer & Co. relative stock rating system utilized by Oppenheimer & Co. Company Specific Disclosures In the past 12 months Oppenheimer & Co. Inc. has assigned buy ratings to securities rated Outperform. MMYT.anticipates that the shares will depreciate 10% or more in price within the next 12 months. due to fundamental weakness perceived in the company or for valuation reasons. Underperform (U) . Oppenheimer & Co. and sell ratings to securities rated Underperform. has provided investment banking services for MMYT. has managed or co-managed a public offering of securities for MMYT. Not Rated (NR) . and/or the ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector. makes a market in the securities of INFY.anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to a perceived absence of strong dynamics that would cause volatility either to the upside or downside. do not correlate to buy. 2008: Buy .21 18. Oppenheimer & Co. has received compensation for investment banking services from MMYT. Inc. Rating System prior to January 14th. Oppenheimer & Co. Inc. and EXLS.50 Count 137 83 3 Percent 41. Inc. Inc. Oppenheimer & Co. In the past 12 months Oppenheimer & Co. and/or will perform less well than higher rated companies within its peer group. Rating OUTPERFORM [O] PERFORM [P] UNDERPERFORM [U] Count 327 305 16 Percent 50. Neutral . 82 . hold ratings to securities rated Perform. aggressive trading accounts might decide to liquidate their positions to employ the funds elsewhere.INDIA Perform (P) . Our readers should be aware that when a rating change occurs to Neutral from Buy. does not maintain coverage of the stock or is restricted from doing so due to a potential conflict of interest. Inc. Inc.90 27. CTSH. Sell . or are expected to perform significantly worse than equities within the peer group. Inc. Distribution of Ratings/IB Services Firmwide IB Serv/Past 12 Mos.anticipates appreciation of 10% or more within the next 12 months.

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