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

8 8.9 8 6.6 6.8 3.5% 191.9 111.0% 241.6% 31.4 10.5 10.9 166.6 4.8 -15.4 FY08 47234 1173 2.6 -91.7 4.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 19.6 5.7 65.0 6.2 4.011.2 58.7% 1031 225 18.7 7.5 8.8 6.7 -118.6 3.6% -38.1 -2.9 8.2 24.9 9.7% 642 123 17.4 21.8 FY09 49832 1249 2.0% 145.2% 732 138 17.1 11.6 19. Reserve Bank of India FY05 31494 700 1.6 4.5 FY06 35867 810 1.2 17.9 25.4% 1088 236 18.1 2000-04 5.7 2.1 4.7 6.1 40.6 6.5 8 52 37 37.2 157.5 10.5 11 50 37 37.9 12.3 10.Centre+States (% of GDP) Fiscal Deficit.2 7.7 106.8 9.1% 38.7 81.9 9.1 14.6 6.0% 37.8% 299.1 4.7 8.3 43.7 1.5 FY11E 8.1 -9.4 6 8 10.6 44.8 11 46 Source: CSO & Oppenheimer & Co. 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 ($B) External Trade Exports Imports Trade Balance Production and Domestic Demand IIP Prices CPI WPI Source: CSO.1 -51.8 17.6% 252.7 5.1 23.4 6 7.5% 260 11 44 17.0% 7.4 74.5 4 5.6 3.1970s to current Variable The Real Economy Real GDP Growth Agriculture Industry Services Savings and Investment Private Consumption Expenditure (% of GDP) Savings (% of GDP) Investment (% of GDP) Government Finances Fiscal Deficit.8% 35.1 30.1 1980s 6.1% 141.6 25.8 55.5 6.7 53 37 36.6 45.2% 36.4 10 65.6 44.3 64.8 11.75 1 8.6 6 .2 9 6 8.5 17.8 5.6 FY10 7.0% 4 3.4% 113 12.9 45.6 3.7 6.3 32.5-8.4 43.7 39.4 6.9 FY08 9.8 3.9 190.4 FY07 41292 913 1.8 11 11.4 8.6 FY05 7.5 48.5 14. Exhibit 2: India Economic Indicators FY05 to Present India Economic Indicators National Accounts GDP Current Prices (Rs.3 1990s 5.4 8.7 36.7 31.6 15.7 2.2 FY07 9.8 9.4 53.3 18.3 64.2 FY06 9.7% 34.9% -28.5 0 8.7 4.5 28 3.4 5.4% 36.2 -29.6 0.1 FY09 6.7 -61.2 5.7 128.8 6.5 3 105.4 -2 6.4 3.4 7.6 10.2 257.2 4.Centre (% of GDP) Inflation WPI (%) Balance of Payments Foreign Exchange Reserves (US$ Bn) Import Cover in Months Currency –Re/$ 1970s 3.5% 1158 247.8 7.6 23.3 37.5 3.3 4.5 6.4 32.9 182.0 4.5 -117.1 -9.0 3.7% 813 170 18.7 7.5 189 307.2 4.4 3.2 299.6 35.5 7.9 7.5 3.5 10 6.6 8 FY10 53071 1330 2.

0% 4.0% 9.0% 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. 7 .0% 8.0% 3.0% 2.0% 7.0% 6. CSO.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. RBI.0% 5.0% 1.0% 0. Oppenheimer & Co estimates.

In our view. The Indian Government expects GDP growth in the 8.8% in CY05 to 2. we believe investors can look forward to four more years (through 2014) of political stability.INDIA Key Points 2011—A Great Time to Visit India India’s share of world GDP has been gradually growing from 1.5%. Comparatively.75% range in FY11 (ending March). and 15-21% in US dollar terms over the next 5-10 year horizon. 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).4% in 2010 as robust corporate profits and favorable financing conditions fuel investments. we believe growth will continue to be robust post recent recovery in FY11 and through FY12.5% in 2010. While the growth forecasts made by IMF and the Indian Government are not comparable. both estimates put India second behind China in GDP growth.3% since FY05. 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. above FY10’s 7. IMF expects the Chinese economy to grow by 10. devoid of resistance from coalition politics as was the case in the preceding five year term. the IMF global growth forecast for 2010 is 4.) Earnings Growth Accelerating through FY12 India’s growth is highly geared to capital flows. we believe. 8 . devoid of pressures from the Left Front. In 2009. India’s GDP growth has averaged 8. In addition. has already shown more latitude with policy reforms. world GDP growth was -1. the new government.3% in CY09 largely due to anemic growth in the developed markets. With a stable Congress-led UPA government at the helm. 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 2009.4% and is expecting growth of at least 9% in FY12.9% coupled with outsized growth in India. and the government’s strong mandate has already improved the outlook for such flows.5-8. Our return outlook reflects 1) our expectation for an annualized medium-term earnings growth outlook in the vicinity of 12-18% in rupee terms. Recently. We expect India’s GDP share to continue to grow on better growth prospects. The Indian Government recently forecasted GDP growth for FY11 to be in the range of 8. the IMF said that India's GDP growth is expected to accelerate to 9. We believe the Indian equity market holds the potential for annualized returns in the vicinity of 12-18% in rupee terms. (Note that our return calculations exclude applicable costs.75%. 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. Key factors supporting our enthusiasm are demographics. Without assuming significant reforms.5-8. More important. 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. a sound medium and long-term earnings outlook.

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. young and educated middle class are likely to continue to drive strong domestic demand. India is considered primarily a domestic economy—its share in world trade is a measly 1.1% to net world merchandise exports compared with China. 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. 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). 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. India’s Planning Commission deputy chairman stated that the government expects the current account deficit for FY11 to be just above 3%. This makes India less dependent on exports for its 9 2006 2007 2008 2009 2010E .7% of the world exports. India’s large investment program and the demographic dividend of a growing.9% of GDP) compared with a high current account surplus (6% of GDP) for China in 2009. with exports constituting only 21% of its GDP. Recently. India contributes only 1. The headline numbers in terms of trade deficit also favor India. with the country actually running a current account deficit (-2.INDIA Domestic Demand A Positive For India Vs. 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. though. Thus. The risk here. compared with India—which constituted only 1% of the US’s net imports in the same year. 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.1%. which accounts for 8.

we believe. 10 . for this kind of an economy. 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. 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. presenting opportunities for both the government and financialservices providers to channel those savings productively. young population economy means that the visibility of nominal and real earnings growth is high.INDIA economic growth and hence reduces the possible impact of protectionism on the Indian economy as a whole. India today resembles the situation of the early 1990s in the United States and the 1980s in Korea. include benign fiscal implications stemming from a wide generational pyramid of workers-to-retirees. the acceleration stage in the purchase of financial assets lies ahead. Other positives. with its higher salaries but lower job security. 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). Contrast this with the situation in the US and more so in Japan. with its social-security guarantees. A well-run. both from a macro and market perspective. can only boost demand for new financial products and the need for Indian investors to remain in charge of their own savings. Public-sector employment. This shift. is declining. private-sector employment. even though it may result in lowering of its net exports. In other words. where a declining young population and a growing retiree base is slowly moving toward an inverted workers-to-retirees pyramid. is increasing rapidly. the ratio of workers to retirees is high. Also.

Indian households have hoarded cash and gold. Over the past several years. India’s transition to an increasingly market-based economic system associated with lower taxation.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 . increased transparency and growing economic and informational integration with the rest of the world. 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.

Going forward. including their savings.INDIA Indian households manage their finances. there is ample reason for India's viability as a destination for foreign investment. In fact. 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. 12 . we foresee a continuation of such a shift in savings behavior on the part of Indian retail and institutional investors. more and more overseas investors are looking at investing in India.

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

India holds general elections every five years. 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. The country shares its borders with the People's Republic of China.5 years and 72. according to recent Census Bureau estimates and is expected to reach 1.588 in FY10 against Rs 31. It covers an area spanning approximately 1.6% of the population in 2005-06.2% of the total population still lived in villages. Pakistan in the west. India. per capita income grew by 10. Although migration from rural to urban centers has increased steadily. In the subsequent elections held in June last year. 1950. Indian politics has been dominated by three major parties since the 1980s—the Congress Party.15 billion. Per capita income (at 2004-05 prices) stood at Rs 33.INDIA India—An Overview India gained independence from Great Britain on August 15. the Janata Dal (JD) and the Bhartiya Janata Party (BJP). However. 14 .821 in the previous year. The Congress Party has historically adopted secular and socialist principles. was instrumental in pushing ahead with the reforms process that liberalized India's economy. which was backed by the Left parties. Singh. respectively in 2009. India's population remains predominantly rural. among others. India has a total population of around 1. Dr.3% of the population in 1950-51 to 67.345 rupees (Rs) in 2009-10 against Rs 40. The Congress Party has been the most dominant party in Indian politics. According to Central Intelligence Agency estimates. According to the Indian Government’s data. Around 35.27 billion by 2016. The largest democracy in the world. India is a federal republic with 29 states and 6 union territories.5% to 44.141 in the year-ago period. according to estimates of national income. India’s life expectancy for males and females at birth is now 67. 1947.6 years. 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. 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.6% of India’s population is below 14 years of age. Its Constitution took effect on January 26. and Myanmar and Bangladesh in the east. having served 12 terms at the helm with 7 prime ministers elected. Dr. Nepal and Bhutan in the north. is situated in Southeast Asia. The 2001 census reported that 72. the seventh-largest country in the world. The world's second most populous country.3 million square miles. The Congress government in 1991 got the liberalization ball rolling by encouraging greater private sector participation and by initiating capital market reforms. In 2004. Singh. The literacy rate increased from 18. Manmohan Singh (India’s current prime minister) and the Congress led a coalition called the United Progressive Alliance (UPA). the then finance minister.

trade protectionism. as measured by Purchasing Power Parity (PPP). India’s huge population results in a per capita income of just $2.070 at nominal rates in 2008. and 3) control of budget deficits. The balance of payments crisis in 1991 threatened to destabilize the economy.960 at PPP and $1.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. and FDI (foreign direct investment). commercial borrowing almost impossible. the Indian economy is the fourth-largest in the world. inflation as well as currency 15 . and 5) domestic political instability. up from 6. 3) the reduction in remittances from the Persian Gulf. lacking. it is the second fastestgrowing major economy with a GDP growth rate of 7. India pursued a developmental policy based on strong centralized planning. classified India as a “lower middle income” economy. Measured in US dollars. which had a large Indian population. Currently. state ownership. inflation high. the government instituted a program of structural reforms aimed at stabilizing the economy and promoting reliance on market mechanisms. 4) the collapse of the Soviet Union and the resulting pressures on India's exports. The main components of the structural reform program were: 1) exchange and trade liberalization. it is the 12thlargest with a GDP of $1.4% in FY10. when a movement toward liberalization and market orientation of the economy took shape. In fact. However. This protectionist regime limited India's economic development until the mid-1980s.3 trillion in 2009. in its June 2010 update. The World Bank. Further exacerbating the crisis were factors such as 1) a widening fiscal deficit. Reserve levels were down to two weeks of imports in spite of an IMF loan of $1.8 billion. regulation & control of private enterprise. India was running a current account deficit of around $10 billion. and strict limits on the entry of foreign capital as well as technology. 2) financial sector reform. India's financial credibility was low. At that time. In response to this crisis. Following independence.7% in a global macro-impacted FY09. 2) an increase in petroleum imports coupled with oil price spikes due to tension in the Persian Gulf.

This is in line with tax reforms focusing on an efficient and harmonized tax system.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). further reform initiatives were instituted. • • • • • In addition. Pension reforms (through the 2003-04 budget) and introduction of a new restructured defined-contribution pension system for new entrants to central government services. From 1999. 25 states and 6 union territories had introduced VAT (Value Added Tax) in place of the sales tax by December 31. refining and banking sectors as well as opening up the insurance and broadcasting sectors to FDI inflows. as a measure of tax reform. Implementation of a scheme called States Fiscal Reform Facility (2000-01 to 200405) to facilitate fiscal reforms by states.INDIA supplies. during this period. the government raised foreign direct investment limits in the telecommunications. The Indian Fiscal Responsibility Act passed in 2003 to provide a legal and institutional framework for controlling deficits and stabilizing debt. including: • The Indian Electricity Act passed in 2003 to encourage competition in the power sector. 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. The program promoted foreign technology transfers and foreign investment in certain sectors of the economy as well as further development of the private sector. such as rationalization of income tax rates. except the armed forces. 2005 Launch of the Indian National Highway Development Program for the construction of 17. The Indian Government instituted significant reform initiatives. 16 .

social and personal services (5.6% in 2009-10. According to government data. should sustain growth. with the move towards gradual liberalization.4% in FY10 exceeded the government forecast of 7. Growth was primarily driven by robust performance of the manufacturing sector on the back of government and consumer spending.3%).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 7.5-8. gas and water supply (6. manufacturing (10. For the recently concluded financial year 2009-10. with the government forecasting GDP growth of 8. Despite the uncertain outlook for developed economies. Per capita income is estimated to grow at 5. privatization and deregulation expected to continue under the current government. transport and communications (9. which is more oriented towards the domestic market. insurance. while consumer sentiment could be dampened by persistent high inflation. real estate and business services (9.6%). GDP growth rate of 7. electricity.6% year-over-year growth in F4Q10. trade. real GDP growth in India is expected to accelerate in FY11 and FY12.7%). further monetary tightening in the pipeline and the beginning of pullout of fiscal stimulus.34%. hotels.5%).2%.3% in F4Q10. a rebound to the 8-9% growth rates seen before the 2008 crisis is very likely in FY11 and FY12. Investment and industrial activity. During 2009-10. community. construction (6. While sustained annual double-digit growth remains a few years away. with 8.6%). the services sector remained the largest contributor to GDP.4%.75% in FY11 and 9% in FY12. the Indian economy registered growth of 7. financing.8%).5%). the manufacturing sector witnessed growth of 16. A majority-led governing party at the helm —the Congress Party—bodes well for continued economic reforms. Economic activities which showed significant growth rates in 2009-10 were mining and quarrying (10. Petroleum & Natural Gas Chemicals Power 17 .

3 0.5% during 1951-52 to 1955-56—the Indian Government’s first Five-Year Plan).5% Manufa cturing. Growth rates of the various economic sectors (measured in 1999-00 prices) during 200304 to 2009-10 are shown below. h otels.5% 17. communication Financing insurance. c omm 49.1% 2. 14. However.9% 56. in subsequent Five-Year Plans. 62.1% Agricul ture.0% 14. 8 5.0% 7. tra nsport. Gas Water supply. 24. real estate … Trade.0% Source: CSO Historically. 3% 17. hotels. realestate Community Social and personal services Mining & Quarry ing.9% Agriculture & Other 17% Services 57% Industry 26% Constru ction. Gas Water supply Construction Services Trade.3% Financin g insuranc e. the agricultural sector had been the largest contributor to GDP (52.6% 2. contributions from the manufacturing and services sectors toward GDP growth have outpaced that of agriculture. transport.INDIA Composition of GDP Exhibit 12: India GDP Share FY10 Agriculture & Other Agriculture Mining & Quarrying Industry Manufacturing Elec. 7.7% Social and personal services. 18 .4% 26.9% 26.2% 13.0% 16.5% Elec.

29 1139.8 12 12.2 12.3 11. gas & water supply Construction Trade.063. transport and Comm Financing.00 6.6 10.215.843.7 2009-10 0.3 11. including semi.30 542.52 3.982.8 6. the fiscal deficit appears to be conforming to the estimates made in the Union Budget for FY11.72 516.064.00 7.4 2004-05 0 8.9 6.7 5. This should help stabilize market expectations of liquidity and interest rate movements.03 435.8 1. insurance.7 7.3 9.00 3.6 7.7 2007-08 4.9 16.92 3. Imposed an export duty of INR 8000 PMT on basmati rice. including (a) Interest Payments (b) Defence Expenditures* (c) Subsidies Plan Expenditures Revenue Expenditures Capital Expenditures Source: CSO 19 .6 4.393.9 3.23 2005-06 5.38 2008-09 8.11 444.8 13.1 6.03 3.INDIA Exhibit 13: Growth in GDP By Sector (% annual real change) 2003-04 Agriculture.74 1.4 13. 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 5.4 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.1 5.9 9.6 5146.00 1152 Total Expenditures (INR Billion) Non-Plan Expenditures. Abolished import duties on crude petroleum and reduced import duties on petrol and diesel to 2.840.8 4.27 1.00 884 1.09 687.1 2006-07 4 8.2 5.38 3.78 2007-08 7.3 11.326.489.60 1.94 1182.00 2.712. hotels.297.00 9.95 1698.00 2.195. even after the supplementary demand for grants is taken into account.9 7.5%.222.19 674.29 2004-05 4.2 10.922.3 8.6 1.1 10.87 4.7 6.091.752.00 902 2009-2010 10.3 10.34 438.80 3.620.00 7. crude and refined edible oils.53 1.8 5.269. Reduced import duties on many iron and steel products.38 4. the government: • Reduced import duties on food items.240.057.076.82 5.6 5.00 733 1.8 11.23 1.710.98 2.3 8.127.62 2006-07 5.322.5%.9 5.2 8.82 534. forestry & fishing Mining & quarrying Manufacturing Electricity.8 2005-06 5.2 3.8 2008-09 1. As a part of fiscal stimulus package.944.7 6.050.1 12.35 1.62 447.1 13.50 1.502.152.5 9.651.135.5 6.087.76 663.30 482.6 10.and wholly-milled rice. social & personal services GDP at factor cost 10 3.8 5.4 7. In line with this.659.406. Lowered customs duty on other petroleum products to 5%.6 3.1 5.833.1 16.32 5.00 1.00 1.310.938. Exhibit 14: Total Expenditures of the National Government 2003-04 4. 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. real estate & business services Community.88 432.

higher income is changing consumption patterns. hotels. communication. Its share was about 40% in the early 1980s. The service sector (including construction) now accounts for about 62% of the country’s GDP. Additionally. These include construction. trade. financial services and business services. High growth in the sector comes from a wide array of services. Given the plans for infrastructure investments in roads & ports. 20 . planned investment in housing and commercial real estate and continued capex by Indian companies. service has been a major driver for the economy’s current high-growth path. transport. food and entertainment. services constitute a higher mix of GDP versus that for other emerging market countries. restaurants. Naturally. the construction sector we believe should remain on a double-digit growth path. dramatically increasing the demand for travel.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.

activity and credit growth are likely to remain subdued in many economies. which reflects improved policy frameworks. Strengthened domestic demand helps emerging market economies maintain growth in the face of lower exports. real estate and business services has recorded average growth of 10. and financial conditions have improved markedly. led by mushrooming growth in communication services. continued provision of ample liquidity. Cuts in interest rates. Most advanced economies and a few emerging economies still face large adjustments. However. social and personal services have recorded average growth of 6. Global View of GDP The global economy is expanding again.7% in the preceding five-year period. supportive forces are still weak. transport and communication has recorded 11. and institutions restructured. These advanced economies grew only about 3.7% over the past two years compared with 6. public guarantees. Emerging and developing economies are further ahead on the road to recovery. gains in activity are now being seen more broadly. emerging economies have withstood the financial turmoil much better than expected. and the general increase in uncertainty and collapse of confidence are gradually diminishing.INDIA Key highlights of growth in the services sector in the recent past include: • • Construction recorded growth of 12.0% in previous seven years compared with an average growth of 11. and commodity-specific factors. and bank recapitalization have appreciably lowered concerns about systemic failure and have supported intermediation. hotels. US dollar depreciation. insurance.8% annually over the past four years. The growth rate in community. Growth in the financial services sector has remained steady but has not expanded because of continued uncertainty in the financial markets. financial markets remain impaired. however. The downward drag exerted by the financial shock. and bank balance sheets still need to be cleaned up. the pace of recovery worldwide will depend on the balance between opposing forces. a low rate considering that they are emerging 21 .6% growth annually over the past four years. and emerging market risks have eased. Going forward. Bank lending conditions are expected to remain tight and external financing conditions constrained for a considerable time. reflecting improved market sentiment. Their recoveries are proceeding at a sluggish pace. banks have raised capital and wholesale funding markets have reopened. prices have responded strongly to perceptions that market dynamics are shifting from significant oversupply to more balanced conditions. However. until the outlook for employment improves significantly. Community. led by a resurgence in Asia—in general.5% (IMF estimates) during 1H2010. In the oil market. the sharp fall of global trade. Low consumer confidence and reduced household incomes and wealth are holding consumption down in many advanced economies. including in the major advanced economies. Financing. social & personal services has declined sharply as fiscal stimulus has eased. It will still take some time.4% in the previous three years when the impact of fifth pay commission wage hikes was felt. Financial market sentiment and risk appetite have rebounded. growth in construction and trade & hotels services has picked up with an overall increase in economic activity and business sentiment. Importantly. credit easing. Many housing markets have yet to bottom out. In this setting. commodity prices have rebounded ahead of the recovery. The recent rally in commodity prices has been strong and broad-based. At the same time. and high unemployment poses major social challenges. • • As of late. Trade.

which expanded by close to 8% and where investment is propelling job creation. persistently high.8% in 2010 and 4. in 2010 and 2011. amid continued excess capacity and high unemployment. followed by a reacceleration of activity. household spending is doing well in many emerging market economies. In advanced economies. respectively. Slack likely will remain substantial. however. However.2% in 2011. Inflation is projected to stay generally low.2%.INDIA from the deepest recession since World War II. with some economies slowing noticeably during 2H2010 and 1H2011. Their recoveries are expected to remain fragile for as long as improving business investment does not translate into higher employment growth. respectively. with a few exceptions among the emerging economies.7% and 2.4%. and unemployment.1% and 6. The IMF forecasts global activity to expand by 4. WEO projections are that output of emerging and developing economies will expand at rates of 7. growth is projected at only 2. 22 .

1 2.7 4.310.003 0.8 billion in 1991-92 to US$280.5 Reserve tranche position 0.9 8.4 50. Foreign exchange reserves grew from US$5.2 6.7 20.1 291.7 12. India’s import cover increased to 11 months in March 2010 from a mere three weeks at the end of December 1990.7 264.67 1.4 3.2 0. However.002 0. other currencies.7 280.1 0.9 182.7 89. or US$57.7 251. India recorded cumulative foreign investments of US$155.825.2 487.7 billion.44 0.2 196. somewhat marred by global macro-led weakness in FY09.0 11. India’s foreign exchange reserves declined by 18.9 12. Foreign currency assets expressed in dollar terms include the effect of appreciation or depreciation of non-US currencies (such as the euro.6 145.39 1. Countries hold foreign-exchange reserves partly to protect themselves against external crises.6 18. leading to significant growth in foreign exchange reserves.002 0.018 0.2 billion in the form of FDI and FII.9 11.7 295. 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.2 2.5 151.2 4.3 8.366. Rising foreign exchange reserves have provided the country a cushion against a potential slide back into recession.287. the sterling and the yen) held in reserves.3 6.5 5.682. primarily due to a positive capital-account balance.9 299.2 12. up 11% YoY to $280.9 62.931. The official reserve assets as of September 2010 were US$291.026 5.3 167.2 309.8 10.7 12.1 billion with a 2HFY10 (Oct. Increased focus on reforms in the post-1990 era attracted more foreign investments to India.1 billion in 2009-10.98 1.98 Total 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-2010 As of September 2010 0.046.9 811.6 Source: Reserve Bank of India As the tables above show.7 401.6 billion. A significant part (over 65%) of the decline stemmed from the movement of the US dollar vs. 23 . in FY10 to date.0 61.9 13.76 0.7% year over year.4 17. forex reserves have rebounded nicely.001 5.473.901.2 0.004 0.7 0.960.5 4.31 1.-Mar.472.1 113. During 1991-92 to 200809. Exhibit 16: Foreign Exchange Reserves INR Billion End of financial year SDRs Gold Foreign currency assets 3.9 56.9 900.8 6.0 76.6 199.2 255.763.614.44 0.2 241.9 33.083 3.2 6.2 5.9 Total SDRs Gold US$ Billion Foreign currency assets 71.191.) led recovery.0 20. In FY09.379.662.414.1 0.9 256.1 0.8 4.INDIA Foreign Exchange Reserves India’s foreign exchange reserves have been rising consistently and expanded at a CAGR of 20% during 2002-03 to 2009-10.47 0.4 135.9 107.0 9.6 Reserve tranche position 31.0 0.005 0.2 12.375.1 191.0 141. gold and foreign currency assets are the major contributors to India’s growing foreign exchange reserves.

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

FDI is allowed up to 74% in fields such as private banks.INDIA and has handed them over to the general permission route under the Reserve Bank of India (RBI). industrial explosives and hazardous chemicals. Allows 100% FDI in new sectors such as power trading. 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 . In the publication of similar editions of foreign newspapers. attracted to the robust growth in Indian capital markets. minority foreign equity of up to 49% is allowed. Set up an Investment Commission to help raise funds in the infrastructure sector among others. 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%. • Opened up many sectors in the manufacturing industry to 100% FDI under the automatic route. In the financial services sector. Subject to other regulations. FDI of up to 100% is allowed with prior consent of the government. processing and warehousing of coffee and rubber. • • • • • For petroleum and natural gas. However. clearing corporations and commodity exchanges. • • • • • • Foreign institutional investors are also significant contributors to the rising levels of foreign investment in India. 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. Under the new guidelines. 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). Increased the FDI cap for telecommunications to 74% from 49%. further streamlining the process. 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. stock exchanges. FDI of only up to 26% is allowed. depositories. Now allows 51% FDI in single brand products in the retail sector. allows 100% FDI in distillation and brewing of potable alcohol. and plans to increase the limit on investment in the infrastructure sector. In the case of asset reconstruction companies (ARCs).

33 2010 10. 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.713 by the end of March 2010 from 1.83 0. also abbreviated Rs) against USD.09 0. conversion of warrants and preferential offers.10 3. 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). 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. The bulk of these investments have come through the primary market.80 1. In September 2010. more than 65% of Mauritius’ population is of Indian descent.36 0. Thus in total.67 24.82 7. the small island nation of Mauritius is by far the largest FDI investor in to India. FII Inflows Foreign institutional investors play an important role in Indian securities markets.86 0. On the flip side. contributing US$10. Large FII inflows in to India also led to strengthening of the INR (Indian rupee.18 8. Also. when FIIs were allowed entry into Indian financial markets.58 0. Since 1992-93.4 billion in FDI inflows in fiscal 2010 or 40% of total. The number of SEBI-registered FIIs went up to 1.38 1. initial public offers (IPOs).25 billion in 2009-10 as against net sales of US$10.79 15.635 a year ago. The FII inflows into the primary market in India come mainly through the conversion of foreign currency convertible bonds (FCCBs). private placement to qualified institutions placements (QIPs). follow-on overseas offers.94 1. This situation stems largely from a double taxation avoidance treaty that offers investors tax benefits and stimulates capital flows into India.21 3.07 1.38 2.06 0. foreign institutional investment has increased over the years except in 1998-99 and 2008-09.45 1.62 1.32 billion in the previous year (2008-09).58 2009 11.41 9. 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.09 7. FIIs can invest up to $30 billion in Indian debt securities.89 Surprisingly. 26 .17 27.38 25.29 0.INDIA foreign institutional investors.73 2008 11. rather than buying via secondary markets. It also decided to remove the restrictions on overseas derivative instruments (ODIs) and derivatives as well as quantitative restrictions on ODI issuance capabilities. 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. merger or takeover of Indian companies that could damage national interests. Their net purchase in equities was US $23.

In FY10.4% 189 307.6 7.2 299.9 32. 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.3 15. The trade deficit.08 to the US dollar on 31st August 2010 to Rs. enhance the domestic money supply and counteract the efforts made by the Central Bank in the past year to manage inflation and inflationary expectations.9 41.3% 166.9 FY 2009 -28.4 -117.7 88.5 44.8 -118.2 15. the main importers of Indian products. The buoyancy of domestic growth (and. In the coming months.9% 182. however.4 40. particularly with regard to interventions in currency markets to support export competiveness and growth.7 -91.2 Balance of payments recovering: For FY09. neither capital goods nor gold imports are contributing significantly to the surge. Although a stronger rupee is beneficial in reducing the fiscal burden of the oil import bill as well as prices of imported commodities.7 106.4 -1. an appreciation of 5.6 52.4 12. however. 47.7 -2.1 43. Oppenheimer & Co FY 2008 -15.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.5 -14 8.6 FY2010 -38.3 19.5 17.6% over a period of a little over a month. India’s balance of payments (BOP) registered a deficit of US$21 billion compared with a surplus of US$91 billion as of FY08. The surge in non-oil imports is the key reason behind the sharp increase in India’s trade deficit.6 43. therefore. 44.2B. continued to be high at US$117. the Indian rupee has strengthened from Rs. Intervention by the RBI in the foreign exchange market to stem the rise of the rupee would.6 78.1 53. the emerging dynamic between the US and China regarding trade and currency valuations is likely to shape policy actions in other economies.46 on 19th October.2 257. Exhibit 19: India’s Balance of Payments (US$ 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. BOP recovered to positive territory at US$15. indicates there is little likelihood of any softening of trade deficit. The appreciation of the Indian rupee relative to the dollar since September has been stronger than that experienced by several Asian currencies. 27 .2 52.7 -21.3 48. coupled with subdued growth outlooks in major industrialized countries. Available data suggest that contrary to popular perception.3 -2.6 36. INR-USD Exchange rate trends: Reflecting the inflow of FII funds in September 2010. Government sources indicated that trade deficit in FY11 may reach ~US$135B. strong import demand).5 100.9 27.3B. The FIIs can buy quality shares through the primary route at stipulated prices with low impact cost.7 90.2 3.

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

As Indian incomes rise. beverages and tobacco is still expected to be the biggest spending category. 32 . although its share is anticipated to drop from 42% in 2005 to 25% in 2025. Today. The key takeaway here is that discretionary spending is expected to rise to 70% of total spending by 2025 vs.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. According to consultant McKinsey’s estimates. the largest Indian spending categories are food. food. rising income levels and supportive demographic trends make India one of the fastest-growing markets in the world for discretionary spending. Transportation. 52% in 2005. the share-of-wallet of consumer spending should also change significantly. 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. beverages and tobacco. by 2025. which includes leisure travel in the mix. and transportation and housing.

In terms of number of listed securities. Exhibit 27: Details of Indian Stock Exchanges as of Mar 2010 BSE NSE Source: BSE. NSE Year Established 1875 1992 Members Listed Companies 1204 4996 1297 1470 33 .INDIA Exhibit 26: India Discretionary vs. 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. India is second only to the US. With the Bombay Stock Exchange and National Stock Exchange put together. India ranked 7th in terms of market capitalization and 13th in terms of turnover ratio as of December 2009. according to Standard & Poor’s Fact Book. 2009.

However. 34 . the Indian outsourcing model. Financial Services Financial services is an important sector of the Indian economy. banking. primarily for the urban populace.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. and pension funds as an indication of that intent. 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. in our opinion. irrigation and water supply. is now increasingly being recognized as the template for global firms. transport. petrochemical and auto-ancillary exports. India’s exports are now more diversified across the globe—reducing its reliance on the US—and outsourcing is increasingly diversifying into engineering. 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. Opportunities abound in banking. Population growth and migration from rural areas to larger towns and cities has led to significant infrastructure investments in electricity. financial and insurance services where current levels of penetration point toward long-term sustainable growth. generating significant employment potential. Indian Outsourcing Last but not least. Migration to cities and towns is thus being fueled by the movement of a young working population with growing disposable income. pharmaceutical. telecommunications. The central government is taking steps to expand the depth of the domestic financial market.

74 122. 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 .150 3.3 7.561 486 $10.410 $31.071 $68.67 252.1 95.6 36 309 132 58 5.4 14. Insurance) Major Players Company Axis Bank HDFC Bank ICICI Bank IndusInd Bank Kotak Mahindra Bank Yes Bank Andhra Bank Bank of India Canara Bank IOB IDBI Bank PNB SBI Syndicate Bank Ticker 532215-IN 500180-IN 532174-IN 532187-IN 500247-IN 532648-IN 532418-IN 532149-IN 532483-IN 532388-IN 500116-IN 532461-IN 500112-IN 532276-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 1.8 1899.79 356.4 11.7 34.3 144 164 80 108 1.608 919 396 3.1 5 1.1 1 3.6 10 190 95 91 1.507 291 $6.3 8.3 16 P/E 22. In the short term. we could see further tightening from the RBI through 2010.34 113. We believe however.9 32. 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.2 14 1. The BSE BANKEX (shown above) has registered 43% returns over the last year.126 330 $7.19 298.0 9 530 350 114 4.5 14. non-oil imports.0 51 176 85 138 1.095.784 $301.031 $27.8 Source: FactSet.2 5 388 223 91 3.27 401.392 $53.379 $15.309 2.356.557 $18.25 1.277 773 460 2.175 $89.0 21. Financial Services. Interest Rate Tightening Remains a Key Risk for BankEx Index Taking into account trends in non-food credit.362 1.393 150 $3.862 52 Week Book P/BV EPS High Low Value TTM 1.550 472 5.867 $17.9 32.INDIA BFSI Sector (Banking.966 $25.268 $56.767 $66.272 $28.326 161 $3.118 1. margins and asset quality of the banks.069 $79.917 2.27 1.17 1. Last month.6 62 2.1 13 202 106 142 1.57 77.128 $126.315 137 $3.949.524 $26.04 71.304 480 $10.128 $243.8 22 588 309 275 1.7 33 844 345 366 2. inflation and growth.47 119. lower NPLs and lower credit provisions. the sector may not offer similar upside.863 1. Pricing as of 12/03/2010.060 729 $16.182 $26.518 1.515 1.124 168 $3.5 11.32 571.395 842 593 2. given the sharp recent rally over the past 5 months. bank earnings could come in higher than current estimates on improved economic conditions—better loan growth.33 81.7 443.918 $433.

As per Basel II norms. 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. have seen sharp appreciation over the past few months given their attractive valuations. Better NPL Trends To Enhance Near-Term Earnings For Banks Bank stocks. especially those of public banks. RBI policy on CRRs (cash reserve ratios). increasing comfort on asset quality and expectation of higher permissible limits in the HTM (hold-to-maturity) category. Capital Adequacy Levels in India Remain Comfortable The minimum capital to risk-weighted asset ratio (CRAR) in India is placed at 9%. Even as valuations get less comfortable. 1% point above the Basel II requirement.25% and 5. An increase in required CRRs over the next few quarters could lead to a decline in NIM (net interest margin). Kotak MF GOI Recapitalization of PSUs Targeting 8% Capital Adequacy Back in April 2010. to ensure each bank has minimum Tier-1 capital adequacy of 8%. by the end of 2010.25%. could impact negatively. Indian banks should maintain tier I capital of at least 6%. All banks have their CRAR above the stipulated requirement of Basel guidelines (8%) and RBI guidelines (9%). respectively. 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. CRR currently stands at 6%. Assuming 25bps of further tightening would take the repo and reverse-repo rate to 6. however. The average Capital Adequacy 36 . An improving economic outlook could lead to an increase in loan demand and provide an impetus to earnings. 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. We view this as a positive for banks that are capital constrained—midtier government owned banks.INDIA 5%. we expect better asset quality trends to drive the nearterm earnings of banks.

35% in FY08 to 13. As of June 30.4%.00% 11.60% 13.INDIA Ratio as per Basel II norms improved from 12.40% 13.20% 12.60% FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Reserve Bank of India Exhibit 31: CAR – Asia vs. Exhibit 30: Total Capital to Risk Weighted Assets in India 13. Most banks in India have capital adequacy of more than 12%.48% in FY09. US Source: IMF 37 .00% 12.80% 12. the CAR of the banking system stood at 13. Europe vs. of which Tier-I capital accounted for 9.80% 11.40% 12.20% 13.60% 12.3%.

and 2) capital expenditure related requirements are likely to increase on account of better confidence levels. 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. Economic data trends have been positive with industrial output increasing nicely. Bank NIIs have already seen an improvement with the RBI’s aggressive tightening policy of late. however. as well as by improved loan demand that allows banks to deploy their resources in better yielding loan assets rather than in investments. 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. interest rates could also harden. Better loan growth is likely to be positive for bank margins and asset quality. 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. and it is likely to be positive for loan demand.INDIA Bank assets in India tend to be comparatively smaller than in other economies.8 times nominal GDP growth over the past 10 years. 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. 1.8X Nominal GDP Loan growth in India has averaged about three times base real GDP growth and about 1. Couple that with positive WPI (Wholesale Price Index). which was in early November). Early Signs of Pickup in Loan Growth Loan growth has seen some pickup recently in conjunction with the festival season (Diwali.

We expect the demand for banking sector loans to rise in the near term as capital expenditures are allocated for new projects. driven by demand for food harvesting. 39 . Seasonal Factors Contribute to Loan Demand Improvement In India. lower levels of fresh NPL slippages and consequently lower credit provisions. Better loan demand/ economic activity should also bode well for asset quality in the system. 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. 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. industrial loan activity generally picks up post the monsoon season (which is typically June through September).INDIA capital expenditure plans.

Union Bank of India Dai-ichi.51% 2. according to the Life Insurance Council. According to IRDA (the Insurance Regulatory and Development Authority). a high savings rate and increasing life expectancy.92% 4.3% between 2002–03 and 2008–09. respectively. UK Bajaj Auto Allianz.24% 0.90% 0. USA Bank of India. Japan Mkt Share FY09 71% 6.16% 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. rising affluence. France IDBI.01% 0. South Africa J&K Bank Metlife. USA Gujarat Ambuja. With an estimated 100 million people entering the insurable population over the next few years. USA Tata Group AIG. insurers sold 10. Asia Pacific Religare AEGON.79% 3. Enam. Federal Bank Fortis. France HDFC Standard Life.14% 0% 0. UK Future Group Generali Group.22% 1. 40 . strong growth in per capita incomes. as on January 2010.65% 0. UK Kotak Mahindra Bank Old Mutual.52 million and private companies 2. Canada Reliance Group None Max India New York Life.20% 0.90% 1. Netherlands Shriram Group Sanlam. respectively.13% 0. 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. At the end of March 2010.03 million policies.8% between 2002–03 and 2008–09. UK Aditya Birla Group Sunlife.06% 0. 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.06% 2. The number of insurance players has increased from four and eight in life and non-life sectors.74% 1. Exide ING Insurance. USA Dabur CGU Life.55 million new policies in 2009-10 with LIC selling 8.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. Germany SBI BNP Paribas. in 2000 to 23 and 22. Italy Canara Bank.6 billion in 2008–09. South Africa Sahara Group None Bharti Group AXA Insurance. 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. Total premium income has grown at a high CAGR of 25.09% 0. The number of policies issued grew at a CAGR of 12.25% 2. the demographics are very supportive of strong growth continuing in the industry.

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.• It has recommended that the government bring down capital requirements for stand-alone health insurance companies to US$10.INDIA General Insurance: As per IRDA data. Measured as premiums/GDP. • • The government has raised budgetary support to US$ 28.3 million for life insurance or non-life insurance business At least US$ 416. 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. IRDA was formed by an act of the Indian Parliament (known as the IRDA Act. A company. FDI up to 26% is permitted in the insurance sector. Per RNCOS estimates. must be incorporated under the Companies Act. India’s penetration level for life insurance is at 4% vs. Regulatory initiatives to promote health insurance include: IRDA has set up a separate department for health insurance. With an estimated 100 million people entering the insurable population over the next few years. 1999) as the regulatory body to govern the Indian insurance sector. demographics are very supportive of strong growth continuing in the industry. We estimate penetration levels to surpass 4.33 billion for the health sector during the Eleventh Plan Policy & Regulatory Framework. Penetration levels are still lower than other developed countries’. to operate as an insurance company in India.4% growth in gross premium collected in FY10 with gross premium totaling US$ 7.42 million from US$20. Capital requirement —paid up equity share capital 1. We are seeing increased focus by the Insurance companies on building up distribution capabilities in Tier-II and III cities. • IRDA does not allow foreign reinsurance companies to open branches in India. the general insurance industry recorded 13. Health Insurance: The Indian health insurance market has emerged as a new and lucrative growth avenue for both existing players and new entrants. 41 . an average of $157 for Asia.84 billion. Premium per capita is $40 vs.83 million. Fast-progressing medical technology and increasing demand for better healthcare has resulted in rising demand for health insurance.5% levels over the next couple of years. 6-9% for other Asian countries. 2. Insurance Penetration Expected To Rise Further It is estimated that only 20% of the insurable population (the age group 20-60) has been insured despite the strong industry growth in the past few years. 1956 and possess the certificate of the memorandum of association and articles of association. • At least US$ 208. This proposal is currently under consideration in the Parliament. 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.

Rising incomes and better living conditions have pushed up life expectancy steadily in India. 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.7% in 1981 to 25. resulting in the breakdown of traditional old-age support structures. there will be a continued upward migration among household income levels. Over the next eight years. the most recent census.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.7% in 2001. 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. Also. the proportion of women in the workforce is increasing. investment and overall job growth in the country. This demographic profile also has favorable implications for savings.00% 3. The growth of “nuclear” families in urban locations. the proportion of women in the workforce has been gradually rising from 19.00% 0. Moreover. penetration of insurance in the country should rise.00% 1. and this is expected to rise further. the Indian household savings rate of 28% is among the highest globally. 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 2025-30.00% 5. We believe that over the next few years.00% 2. more than 100 million individuals will enter the working age of 15 to 65 years.00% 4. In India. also supports this trend.INDIA Exhibit 33: India’s Penetration/GDP levels 6. Expenditures on social protection and health are therefore a lot less when compared to those of most developed countries. it is not surprising that household savings constitute a large 70% portion of gross national savings for India. Therefore. 42 . According to the Registrar General of India. Only government employees are entitled to pension benefits post-retirement. government-funded retirement programs for its citizens are virtually non-existent. The Demographic Profile Is Strongly Supportive Of Insurance Growth India is a relatively young country.

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

Segments covered in the non-life insurance market include auto. As of January 2010 in the nonlife insurance market. out of which 7 are public sector players (including 1 reinsurer) and 15 private sector firms. marine and engineering. A rise in sale of passenger cars continues to fuel demand for auto insurance. Growth would have been even higher if not for the global macro meltdown in FY09 with FY09 recording just 10% growth. 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. auto insurance premiums have increased at a CAGR of 22%. Auto insurance had the largest share of 43% in the non-life insurance segment in FY09. 44 . there are 22 players. premium income grew at a CAGR of 14% between FY03 and FY09.3% in FY09. the number of passenger cars increased at a CAGR of 16%. fire. among others.INDIA Exhibit 34: Life Insurance Market Share – LIC vs. The health segment recorded growth of 21. Public sector companies have a dominant share in the marine insurance segment. health. Between FY03 and FY10. Between FY06 and FY10. 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.

Even assuming life insurance penetration increases from current levels of 4% of GDP to 5% over the next five years. It is also the fastest-growing market with a growth rate of 25% over FY05-09. strong growth in per capita incomes. 45 . the demographics are very supportive of strong growth continuing in the industry. implies potential growth of 20% for the industry over this period. albeit aided by the surge in linked products.INDIA Exhibit 35: Market Share of Non-Life Insurance in FY09 10.30% 12.90% Reliance General 5% 11. With an estimated 100 million people entering the insurable population over the next few years. 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. a high savings rate and increasing life expectancy.2 billion in FY01 to US$53 billion in FY10.10% 6. rising affluence.20% IFFCO-Tokio ICICI-Lombard Bajaj Allianz New India 8.

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

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

973 $2.425 $13.1 24.76 $21. and consensus is now positive.67 38 17 318 64 2.444 19.6 3.13 $10.51 $1.7 13.883 1.268 $558 $633 $2.6 1. 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 .34 $14.806 $476. Exhibit 37: BSE IT Index 6500 6000 5500 5000 4500 4000 Source: FactSet Data Systems IT stocks have rallied sharply on the Indian bourses.3 19.7 9.641 $3.83 $9.2 11.15 $14.39 8.249 730 551 215 121 1.158 500 798 $18.575 $3.1 $7.43 $24.49 $0.884 $63.475 $16.0 2.2 10.INDIA IT/BPO Services Major Players Company IT Services HCL Technologies Hexaware Tech Infosys Tech.5 38.3 106.0 1297. especially for the IT services large caps. however.4 6.079 252 86 8.038 83.7 eClerx Services Genpact WNS Holdings ExlService Holdings Firstsour. A pickup in demand from the financial services vertical.701 20.641 $233.049.112 1.9 2.913 61.123 501 466 158 64 1.5 11.4 $8.6 24.7 4.629 2.00 6. Mindtree Patni Computer Polaris Soft.877 12. Current hedging levels are not adequate to protect against sharp rupee appreciation.8 1.1 14.267 $4.51 $16.6 1.8 99.2 30.96 $69.46 5.7 4 #N/A #N/A Source: FactSet.41 $1.Tec.783.0 62.144.9 0 1 P/E 423 88 3. 533011-IN 9.36 $3. The BSE IT index is up 40% in the past year. Pricing as of 12/03/2010.085 15.321 $4.9 0.418 1. lower project cancellations and favorable cross-currency movements continue to provide a tailwind for IT stocks.81 $12. Rupee appreciation remains the key risk.761 1.4 20 33 0.60 $0.6 4.093 $240 52 Week High Low 455 103 3.9 27.40 $11.6 0. Vishal Info.453 $18.8 9.8 2.6 $8.10 Market Capitalization (INR Crore) (US$Mill) 287.095 667 428 727 666 574 972 22 4 4. 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. 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$ $9.1 120.333 490 386 132 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 0.95 $21.636 75.71 $15.Solu.836 $396.

Growth has started to emerge with a rebound in the BFSI market although telecom still continues to lag. telecom. BP has consolidated its vendors by awarding extra work to IBM. 13% Source: Company Reports and Oppenheimer & Co. Telecom demand is expected to get a push from emerging markets. A similar exercise is being taken by companies such as Chevron. While BFSI is showing signs of improvement. Exhibit 38: Indian Offshore Sector Revenue (2009) Others. which we believe is likely to result in incremental volume growth for Indian vendors. Telecom Show Meaningful Rebound. In 2010.2%. retail and manufacturing might take longer to recover. Vendor Consolidation and Efficiency Spending To Drive Growth We have seen vendor consolidation and onsite contractor replacement exercises adopted by several large customers. 18% Retail. which contribute more than 80% to Tier 1 IT firms’ revenue. In our view. this wave of offshoring by companies that have offshore spending of less than 10% of total IT application spending is likely to continue. Infosys and Wipro. 11% Energy/Utilities. offshore spending is also picking up in areas where global delivery is required for better business efficiency. This spending shift is likely to happen in verticals such as energy and utilities. 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. Apart from vendor consolidation.INDIA BFSI. 49 .9 billion in 2013 for a CAGR of 6. telecom. media. 5% BFSI. This includes spending directed towards retaining and growing customers. Declines Arrested in Manufacturing Four verticals— BFSI. Worldwide Market Overview: Market researchers IDC expect the offshore IT services market to reach $41. 36% Manufacturing. For example. 17% Telecom. as most of these companies have yet to reach an optimal level of offshoring. retail and manufacturing. retail and manufacturing— contribute about 84% of Indian IT vendors' revenue. retail and manufacturing. the United States contributed 65% of the overall revenue with Europe 31%. in our view. Exxon and a few others.

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

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

and emerging geographies and vertical markets such as Asia Pacific. and virtualization. there is tremendous headroom for growth as the current off shoring market is still a small part of the overall outsourcing industry. healthcare and government respectively. on-demand ERP. and can lead to Indian IT-BPO revenues of $225B by 2020. followed by HR outsourcing. security. or software as a service. largely focusing on infrastructure. Significant opportunities exist in core vertical and geographic segments of BFSI and US. IT services is expected to grow by 2.2% in 2011 (Gartner). and cloud computing solutions.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.4% 2010. it is expected to rebound by around 4% in 2010 and close to 5% in 2011. Other areas of spending include data management. and 4. and security. 52 . We believe key near term drivers for IT services could be SaaS. retail. Development of these new opportunities can triple the current addressable market. Outlook We believe the improving economic conditions and a return of consumer confidence and renewal of business growth should drive IT spending going forward. BPO spending in 2010/11 is expected to be increasingly driven by the F&A segment and procurement. Even though India has a 51% market share of the offshoring market. Government IT spending as well continues to rise across the world.

Corporate Credibility The effects of the Satyam debacle (in January 2009. This group involves providers offering such IT services as SaaS and cloud/utility computing. The second group involves an alternative means of procuring IT services.INDIA Key Sectoral Risks Protectionism The increase in government intervention with private sector industries. coupled with rapidly increasing unemployment. 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. However. 53 . such as Egypt and China. The first group involves increased investment by emerging offshore locations. and IT offshore providers especially the Tier 1s should continue to benefit on their higher mix of “fresher” employees (that is. The impact on offshore providers will be to utilize more local resources or potentially invest in new delivery models for local use. is heightening citizen reaction to the use of offshore resources as undermining employment opportunities. we believe that offshore providers need to provide maximum transparency of their companies' financial and business operations. particularly in the United States. which are building up their local capabilities and promoting their abilities to developed markets. 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. While benign wage inflation’s benefit has abated for the IT sector. . Increased Competition Including New Competition from New Locations Competition in the offshore world is coming from two major groups. These IT services can also be construed as opportunities given the need for deployment and maintenance services. such as finance and manufacturing. employees with less than 3 years’ experience). we would note that wage inflation should remain under control in the lower teens.

63 75.04 billion.914 $10. According to Jyotiraditya M Scindia.2 134.97 38. Market Size India's pharmaceutical industry is now the third-largest in the world in terms of volume and stands 14th in terms of value. revenues) of India's pharmaceuticals industry between September 2008 and September 2009 was US$ 21.75 $8.349 786 374 3.92 billion in 2007-08 and to US$ 8.6 6.1 27.835 625 375 476 402 520 413 331 1. 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). India accounts for only 1.826 574 370 447 288 496 $17. In addition to cost benefits. These include greater access to the patient population they are trying to serve.1 -32 606 379 116 4.5 12.53 22. Wockhardt Torrent Pharma. 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.1 2.4 5.9 24 1. The Indian pharmaceutical industry also provides a wide range of contract services across the drug development value chain including drug discovery.0 15 426 115 -22 -16.097 $102.9 5 809 600 1.776 221.4 10 385 230 97 3.Inds. contract manufacturing.26 billion Export of pharmaceutical products from India increased from US$ 6.164 309.0 Source: FactSet.12 $9.995 $8.59 $12.37% and 28.94 $6. with a 1-2% market share.481 $68.051 364 300 280 265 262 97 684 267 129 74 88 144 58 7.02 157. access to indigenous plants known to have huge medicinal potential (but not fully tested or commercialized yet). pharmaceutical exports from the country have recorded growth rates of 21.288 $28.112 45.5 78. with the US alone accounting for 20-30% of total revenue.013 $10.8 4.434 463.8 -11.2 23.991 358 $7.0 8. respectively.6 34. 14. the domestic market was worth US$12.41 $11.669 374 $8.25%.675 $53.3% of the global pharmaceutical market.INDIA Pharmaceutical Sector Major Players Company Unichem Labs. According to data published by the Department of Pharmaceuticals. Around 45% of total revenue for the Indian pharmaceutical industry comes from exports.61 48.033 $35.61%.5 20. the total turnover (i.426 771 441 1.30 100.23 billion in 2006-07 to US$ 5.7 billion in 2008-09—a combined annual growth rate (CAGR) of 21.366 297. 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. Aurobindo Pharma Glenmark Pharma. Piramal Health Dr Reddy's Labs Ranbaxy Labs. Cadila Health.118 52 Week Book P/BV EPS High Low Value TTM 268 105 62 4.915 $22.80 $40. 2007-08 and 2008-09.035 241. the global pharmaceutical majors also enjoy certain other benefits in shifting their R&D operations to countries like India.0 5.4 42.060 $20. Cipla Sun Pharma.9 20.23 $9.011 $16. Ministry of Chemicals and Fertilizers. Of this.458 $4.6 37 21 50 14 13 9 23 15 P/E 16.637 $66.5 51. Pricing as of 12/03/2010. most Indian companies are still in the early stages of their ramp. Jubilant Lupin Ticker 506690-IN 532300-IN 500420-IN 524804-IN 532296-IN 532321-IN 500302-IN 500124-IN 500359-IN 500087-IN 524715-IN 530019-IN 500257-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 249 $5..666 567 $12. Export Driven Market Despite having many domestic players.172 $49.8 36. 54 .669 1. Minister of State for Commerce.e. in the three consecutive years of 2006-07.9 0.769 92.54%. clinical trials and data management to foreign multinational companies.

5%. intermediate and generic drug production to India. considering that it currently spends more than US$2 trillion annually on healthcare and subsidizes medicines for the elderly and the poor.7% of the GDP in Germany. and consumers accord a high priority to healthcare. 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. Clinical trials are increasingly becoming expensive in the developed world.7% in Canada and 9. due to the huge cost and time benefits. which correspondingly employed 12. This is because primary drugs are essential commodities. 55 .INDIA In fact. 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. 2x the average rate of inflation (source: Kaiser Health Research). 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). high quality Indian manufacturing has become essential for API and intermediate production. 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. many multi-national pharmaceutical companies in the US and Europe have been increasingly outsourcing API (active pharmaceutical intermediate). Low cost. 9. The generic drugs imported from India are. in turn. create necessary manufacturing/research facilities and widen portfolio of clients and services reducing concentration risks. These multinationals also have a significant say in the governments in these countries. with private insurance companies and funds accounting for more than 50% of total healthcare expenditure. Recent estimates indicate that the average insurance premium for family coverage in the US in 2008 grew at an average rate of 5%. The government: Cheaper generic drugs are an important factor in the cost cutting plans of the US Government. including about US$121 billion in savings in 2008 alone. Indian companies have acquired firms that give them client access. the governments in the US and Europe would seemingly want to further promote their imports from India. beneficial to consumers that typically pay a lower health insurance premium for using these drugs. The insurance companies would thus benefit from cheaper drugs manufactured in India. 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. cheap generic drugs exported from other countries have proven to be a silver lining. Thus.3% of the US working population in 2008 compared with healthcare and social assistance services. In fact. The insurance companies: Around 85% of the US population has health insurance coverage. Healthcare expenditure generally accounts for a major share in the total spending of developed countries including 10. With India being one of the major sources for manufacturing these cheap generic drugs. 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.5% in France in 2008. the pharmaceutical sector employed only 0. With rising healthcare costs in Europe and the US. 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%.

Large number of FDA approved plants—India has the largest number of FDA approved plants outside the US. The Indian cost advantage has been pegged at 1/6 to 1/3 of the cost of drug development in the West. Second-largest pool of qualified medical doctors globally after the US. • • • CRO Business—High Barriers To Entry.5% per year to reach US$ 35 billion by 2015. out of every 5.5 million qualified scientists with majority if not all of them English speaking. only 250 enter pre-clinical testing. World class skills—India scientists have the skills necessary for chemistry-based manufacturing. Existing strong manufacturing base—India has traditionally strong manufacturing skills. Manufacturing of commercial scale API and intermediates is shifting to India while early stage manufacturing is still being done in Europe and US. and the country is known for generic manufacturing. • • 56 . 3) faster patient recruitment.5x more than it did 15 years ago. medical and therapeutic expertise. R&D driven pharma companies are under pressure to reduce R&D costs. and only one eventually is approved by the USFDA. introducing a new drug now costs 3. Besides lower trial costs. clients need patient access. clinical development teams. CRO—Outlook Globally. 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. According to PhRMA (the Pharmaceutical Research and Manufacturers of America). The CRO market size is estimated at US$21 billion in 2009 and expected to grow at 8. only five make their way to clinical testing. Global R&D expenditure has grown to ~US$60 billion in 2007. This is a natural extension of India’s core competency in chemistry-driven manufacturing. India—A Popular Destination for CROs Key factors favoring India include: • Large pool of labor with chemistry skills. CROs provide substantial global capacity to drug developers and have become a critical contributor to clinical trial activity.000 screened compounds. Clinical trials conducted by CROs are completed up to 30% more quickly than those conducted in-house by pharma companies. Labor costs a fraction of those in the developed world. 2) English speaking scientists at significantly lower costs than developed markets. Due to the large number of clinical trials required by USFDA.INDIA CMO Business Most of the Indian companies are operating in the CMO field. 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. focused on APIs and intermediates. Of these.000-10. with India having about 8.

the US dollar. Key risks include: • • • Continuing regulatory compliance necessary to be in the business. Exchange rate risk with the volatility of the Indian rupee vs. Limited operating history and evolving business models with widespread use of M&A for growth. • 57 .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. Increasing competition in India and China.

i.110 59 $1.675 crore for elementary education under the 13th Finance Commission grants for 2010-11.95 9. This is evident from the fact that annual school fees have increased multifold across India. states have access to Rs 3. new areas can open up 58 . 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.3 Source: FactSet. However. Currently. PPP Model—More Food Than One Can Chew! The government is involving the private sector in computer training for public school children through ICT. government and private bodies believe that growth in school education in India will be very strong.9 32. This business is growing very fast.1 21. rising income levels have boosted the propensity to spend on education.66 54. 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.495 $2. Successive governments continue to emphasize education and to set targets to increase spending on education to 6% of GDP.741 $2.549 52 Week Book P/BV EPS High Low Value TTM 876 442 184 3.4 11 P/E 24. The National Ministry of Education estimates that India needs to build close to 200. free and compulsory education becomes a fundamental right. approximately 52 million children between ages 6-14 are not enrolled in any school. Government data indicate that about 220 million students access the education system with another 100 million out of the system. The “Right to Education Bill 2009” makes it mandatory for government to ensure that all children below 14 years of age are enrolled in schools. This alone will create an additional market of US$ 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. of which 95% are government schools and the balance private schools. In addition. Pricing as of 12/03/2010. The FY2011 central government budget allocated Rs31.5 billion in coming years.9 2 325 150 101 2.972 $5. India has a million schools.31 9.3 29 78 51 31 1. However.1 24 756 334 188 3. 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.409 $12.e.091 628 $13. in addition to the capacity needed to include those outside the school system. 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. Similarly.165 241 $5.036 crores for education translating to a 16% increase YoY. Education at all levels remains a key focus for the government.INDIA Education Sector Major Players Company Educomp Everonn Systems NIIT Core Projects Manipal Education Ticker 532696-IN 532876-IN 500304-IN 512199-IN Private Price Market Capitalization INR US$ (INR Crore) (US$Mill) 570 $12..4 21.36 24.

unlike mainstream schools. The model has been accepted by the political circle and will be focused incrementally on new initiatives.7 billion). Chate Classes. This bodes extremely well for the education sector. new education and communication technologies. at Rs70 billion (US$1. 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. From board exams to school tuitions. with very respectable business growth The Education Market Shifting demographics. IITs. medical. More than 5 million children enter playschools in India every year and stay for two years. Last year. We believe the opportunity is much larger. The dependence on board percentages to secure entry into engineering or medical colleges ensure high growth not only for players like Career Launcher. Vidyasagar Classes. rising student expectations. build school infrastructure. and Career Point — have nationwide franchise operations. and Aggarwal Classes but also for private tutors. IIMs and now GRE. Big private players — such as FIIT JEE. We find that spending levels for home based private tutoring are much higher than for classes at coaching centers. teacher training etc. typically the last thing to get affected is the education budget. 44% is below the age of 19. 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. for competitive exams alone. This is true across the globe and more so in India because of social reasons. and some of these have even started offering coaching to students in the US. Some of the big players have estimated the market potential of organized coaching in 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. which makes this an Rs150 billion market. IMS. Of India’s population. 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. 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. we think. governmental and private focus. Chate Classes has more than 100 branches all over Maharashtra and up to 50 branches in Mumbai. paying around Rs15.000 in fees per annum. 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. Structural Story On Favorable Demographics India ranks second in the world in population. making it the youngest nation in the world. when globally everything had fallen apart. 59 . This has the potential of creating additional markets for all private players. where profitability typically happens only after five years of operations. Career Launcher.000-18. Recession-proof Industry In recessions. Demand for education will continue to increase over next decade at surprising speed. the education sector in India bucked the trend.INDIA for PPP (public/private partnerships) like private school management of public schools. and a host of new players are creating profound and wide-sweeping changes in the Indian education landscape. there is demand at all education and income levels.

Though this continues to be a largely urban phenomenon.3% in 2003. We believe private education in India is expected to grow at the pace China saw over the past couple of decades. However. expenditures are highest for tuition fees and private coaching fees. both in terms of scale and innovations. From being banned until the mid-1980s and with virtually no private schools in China until 1989. 60 . We note that a new private school reaches maturity in the seventh year. We believe increasing purchasing capacities of mid-income families and higher skill requirements will put tremendous expectations on the school system. A recent McKinsey report projects education and recreation spend to capture a larger share of wallet at 6% and 9% in 2015 and 2025.8 times for all income categories taken together. The average Indian middle-class household spends 1520% of its income on education/careers of its children. 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. coinciding with peak revenue status in the fifth year of operations. respectively. which is much below the level predicted for a country of India's per capita income level.1% over 2005-2025 as we see an increase in the purchasing capacity of middle-income group families. 20% of pre-schools. Currently.4% of elementary schools are in China's private sector. Operating margin for a school in a steady state can reach about 40-50%. where India has a comparative lead. 3% of middle schools and 0. education attainment to the secondary level has increased to only 16% in 2004 from 8. expenses are high for uniforms. Private Schooling A Strong Business Opportunity The Indian Education Ministry believes there is a requirement of 200.000 K-12 schools in the near term for meeting growing education needs.1% of per capita income in 1983 to 6. Break-even is achieved in three years of operations. 9% of vocational high schools. The gross enrollment rate in secondary education is 47%. private tutoring has made inroads in rural areas as well. private education has grown dramatically since in that nation. Over the past two decades. whereas in urban areas. According to the Seventh All India Education Survey. However.5% in 1984. The patterns of expenditure in rural and urban areas are different. Private education spend is growing both in rural and urban India. books and stationery. Perceptible Shift in Mindset Toward Education Spending Private share of spend on education in urban India has grown from 2. despite this supply constraint. from 5% in 2005. This demand for education can be explained by the fact that wages are much higher for workers with higher education levels. In rural areas. and we believe private education spend will continue to rise at much higher pace. 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.INDIA We believe that the emergence of mass private tutoring blurs the distinction between school teaching and supplementary teaching. 54% of tertiary institutions. we believe demand for secondary education will continue to rise as returns on secondary and higher education are significantly higher. 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 12.4 times between 1983 and 1999 for the poorest 40% of country's population. it rose 10. Spend on education and recreation is expected to rise at a CAGR of 6.

3. reducing the ability to scale up fast to a few players.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. well-trained teachers.1 billion) for elementary education under the Thirteenth Finance Commission grants for 2010-11. reducing margins in the business for all players. This had been the apparent problem with a few players last year. Execution Execution remains a big challenge as the sector is throwing off opportunities. but the talk remained talk. but how much can be grabbed is a matter of how much can be implemented. and nothing materialized. School ecosystems such as infrastructure.800 crore (US$5. Lack of Experience for Private Players Private-sector players without much experience in education are venturing into many new areas.81 billion) in 2009-10 to Rs.72 billion) in 2010-11. the Indian Government has declared its intention to revolutionize the system. 31. Indian states will have access to Rs. There is a fear of margin pressure in general for the sector. And the scarcity of infrastructure can leave the opportunity untapped.036 crore (US$6. In addition. This time. 61 . Increased Competition From Regional Players In Government Business ICT (information and communication technologies) has experienced strong competition from regional players. Balance sheets have become heavy with debt.. but there always has a risk of this fizzling out halfway. This could lead to some avoidable mistakes. 26. momentum has picked up.675 crore (US$796. better content etc. Momentum May Fizzle In the past. Budget 2010-11 The Indian Government has increased the planned allocation for school education by 16% from Rs.

even as the sector grew 3x in size between FY06-09 (for a US$18 billion industry). These moves should ease pressure on Indian retailers’ balance sheets. according to the Department of Industrial Policy and Promotion (DIPP).479 $5. in single-brand retail trading. stood at US$ 194. BMI further predicts that sales through MGR outlets will increase by 154% to reach US$ 15.29 billion by 2014.662 65 $1. While the cost reduction drive. free media.17 25. margin expansion and lower capital requirements improve balance sheet health. exiting noncore businesses. 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. there will also be opportunities in India's tier II and III cities. Foreign direct investment inflows between April 2000 and April 2010. Status Check After 3 years of rampant roll-out. After having seen samestore sales decline and overall industry growth dipping to 4-5% in FY09. modern outlets.4 50. introduction of international brands and changing lifestyles in urban India. Mass grocery retail (MGR) sales in India are forecast to undergo enormous growth over the forecast period. This is a consequence of India's dramatic. Indian organized retail is coming back on the right track. deteriorating business economics.0 9 776 320 75 9. organized retail is likely to get back to double digit growth in 2009 with bigger players growing faster. retailers are in coursecorrection mode and reducing excesses—closing down nonviable stores and formats. India continues to be among the most attractive countries for global retailers.6 26.376 $1. Organized retail is set to witness the sharpest earnings improvement over the next couple of years.4%. With the expanding middle and upper class consumer base. with reduced competitive intensity.306 $19. Retail Opportunity A recent BMI India Retail Report forecasts that the total retail sales should grow from US$353 billion in 2010 to US$543.1 Source: FactSet. On the other hand.69 million.2 billion by 2014. Access to key resources like people and property is becoming easier. rapid shift from small independent retailers to large.9 2 P/E 43.94 87. cutting down on inventory levels. etc. ”Mall culture” started in India in the last 4 to 5 years and has created strong 62 .6 14 83 41 73 0.401 728 $16.639 52 Week Book P/BV EPS High Low Value TTM 528 323 136 3. Jones Lang LaSalle Meghraj forecasts ~47m sq ft of retail space to operationalize over the next 3 years. Pricing as of 12/03/2010.INDIA Retail Sector Major Players Company Pantaloon Retail Shopper's Stop Provogue India Ticker 523574-IN 532638-IN 532647-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 402 $8. organized retail is back on a growth path with a recovery in consumer sentiment. The greater availability of personal credit and a growing vehicle population to improve mobility also help contribute to retail sales growth of 11. The cost of doing business is falling. leveraged growth and a few casualties.43 7.

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

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

The Indian television advertising industry is estimated to have achieved a size of Rs. 48. 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. 0% Out of Home Advertising.00 5. growing consumerism.094 72 $1. and changing demographics.82. 41.289 52 Week Book P/BV EPS High Low Value TTM 162 121 42 3.e.539 94 $2.155.0 % Radio Advertising. 6.9 14 135 75 39 2. Exhibit 40: Advertising Spend By Medium Television Advertising.6 4 99 66 52 1. which has been negatively impacting broadcasters for years.5 billion in CY08 and is expected to grow at a CAGR of 13.. Low Ad Spend As A Percentage of GDP Promises Huge Growth Potential Total ad spending.4 % Print Advetising.9 36.61 13. on the back of the country’s economic growth.4 2 547 319 48 10.95% for UK and 0.INDIA Media Sector Major Players Company Zee Entertainment Television Eighteen Sun TV IBN18 BROADCAST NDTV Ticker 505537-IN 532299-IN 532733-IN 532800-IN 532529-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 148 $3. The transition to digital provides a solution to the perennial underdeclaration of subscribers (i.4 -5 172 85 56 1.4 43. as a percentage of the GDP. which is quite low in comparison to 1.54% for China. 3.5% to Rs. will rise going forward. increasing disposable income. video piracy).924 $45.47%.28 144. as a percentage of India’s GDP. 0.924 520 $11.949 90 $2. Pricing as of 12/03/2010. 1.08 22. stands at around 0. 65 .1 -20.3 Source: FactSet.802 $1.7 -310.2 Online % Advertising.34% for the US.5 billion by CY13 (source: FICCI—Federation of Indian Chambers of Commerce and Industry).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.421 $32.272 $4. We believe that India’s ad spend.158 $2.56 204.6 0 P/E 41.

and there is intense competition within these segments. 0. while cable operators pocket the remaining amount. and IPTV operators.5% and 0. Hindi Business News. DTH operators. respectively. Such intense competition raises concerns over the business model of new players. Any further intervention could lead to more price control by the TRAI. such as CAS and DTH. as the precise number of subscribers will be revealed. both from existing players.35 per channel on á la carte basis for cable operators providing service through CAS. and broadcasters will also command a higher revenue share. 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. as well as new satellite channels being launched. and we believe that only those with deep pockets and quality news content will be able to survive. The move likely will lead to an increase in the revenue streams for broadcasters. 0. broadcasters are charging higher subscription fees to DTH operators for providing their channels.2%. provides broadcasters with the chance to cash in on the lost opportunity.2%. 66 . Hindi News. while multisystem operators (MSOs) will receive 30% and local cable operators (LCOs) will receive 25%. which would further cap subscription revenues for broadcasters. Following the failure to come up with any solution on pricing of channels to DTH operators.INDIA Merely 10% of subscription revenues reach the broadcaster. Currently. However.5. The arrival of new delivery platforms. English News and English Business News command a viewership share of 3. Subscription Fees Capped by TRAI Broadcasters receive subscription fees from subscribers through cable operators. 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.8%. the TRAI has fixed subscription fees for pay channels at up to Rs. Of the total market. broadcasters will receive 45% of subscription revenues. As per the Telecommunications Regulatory Authority of India's (TRAI’s) notification on interconnection agreements in the CAS notified areas.

78 144.583 $21.61 96.5 27. the BSE Auto Sector is up a whopping 355%.6 Source: FactSet.1 29.188 $166. Auto sector stocks have recorded the most impressive return performance since the Indian market indices bottomed in March 2009.INDIA Auto Sector Major Players Company Maruti Suzuki Hero Honda Bajaj Auto Tata Motors Mahindra & Mahindra Exide Industries Ashok Leyland Swaraj Mazda Ticker 532500-IN 500182-IN 532977-IN 500570-IN 500520-IN 500086-IN 500477-IN 505192-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 1.72 365.400 $31.663 810 94 17.9 15 P/E 16.596 $35.708 799 $17.2 28.565 $102. Over the past 12 months.767 170 $3.323 52 Week Book P/BV EPS High Low Value TTM 1.4 36 180 102 23 7.713 $32.10 404.5 3 437 211 141 2.864 1.315 1.387 $89.8 27.463 411 $9.648 1.350 645 220 6.954 $1.917 $81.22 750. 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 .0 44 826 475 180 4.171 422 3.094 1.832 $40.9 22. Since then.6 6 82 46 30 2. the sector is up 51%. Pricing as of 12/03/2010.949 $97.1 26.7 22.14 5.0 59 1.2 64 1.48 461.3 86 2.570 1.315 $29.158 73 $1.75 439.497 223 8.

76. the potential for continued volume growth is immense. Cost of Financing Expected To Move North In India. During 2HFY09. on-credit car sales fell sharply.86% Commercial Vehicles. 91 in Brazil and 46 in Thailand (source: KPMG). 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. 68 . 4.32% Two Wheelers. As a result. 15. barring substantial infrastructure bottlenecks. 186 in Korea.58% Source: SIAM.23% Three Wheelers. 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. 3.INDIA Exhibit 42: Auto Market Share 2009-2010 Passenger Vehicles. For example: there are only 7 cars per 1.000 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. banks lowered the cost of financing and started providing various schemes for passenger car buyers.000 people in India as opposed to 202 cars per 1. At the same time. which in turn impacted overall sales growth for the industry. financed sales in the passenger car segment play a vital role as ~70% of sales done are on credit basis. We believe this to be one of the factors that contributed to the strong growth in demand for passenger cars over the past year. Accordingly.

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

Pricing as of 12/03/2010.081.218. 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. with most of the impetus stemming from the favorable election results. infrastructure stocks have far outpaced the rise in the Sensex in some cases by more than twice that.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 $2.705 2. government stimulus packages announced 70 . The government aims to increase infrastructure spending to over 9% of GDP by 2014 from the current 5.89 1. irrigation and water supply.89 34.38 149.423 $270.8 17. Lack of liquidity affected project returns and viability. 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.645 $33.254 49 $1.367 $42.212 1. 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). power.6 61.2 1 74 41 21 2.761 331 $7.371 349 5.10 1. ~70% of the investment is expected to come from government spending.8%.2 10 185 96 17 8. Underdeveloped roads.7 69. Strains on India’s infrastructure include • • • Power demand shortfall.35 35.020 $44. Liquidity Drought in FY09 In FY09.36 23.3 0 226 81 91 1. Capacity constraints on port traffic leading to bottlenecks at the ports. Additionally.082 106 $2. and accelerate the time line for project approvals through simplification of procedures. 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.4 27.8 73 500 304 210 1. per the RBI. the public-private-partnership model should gain traction. Investors likely have marked up the stocks in the hope that the unencumbered pro-reform government in place could boost spending on infrastructure. Pro-Reform Government—A Positive for Infrastructure Post March-2009 lows.400 52 Week Book P/BV EPS High Low Value TTM 198 110 101 1.152 $7.3 8 2.671 $7.695 2.08 189.3 10. 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.5 2 P/E 16.26 294.376 2.127 $5.4 47. However.060 325 6.693 $240.210 $49. Per the plan outline. the lack of liquidity and as a result the increased cost of debt proved to be a detriment for infrastructure projects.8 47 2.6 19 75 41 15 4. with the Central Government contributing ~37% and state governments ~33%.812 147 $3.1 1216.298 $65. which tend to be capital intensive.0 Source: FactSet.139 62 $1. With the private sector expected to invest ~30% of projected expenditures. eliminate policy bottlenecks.

618 billion (US$57 billion). the Eastern Corridor from Ludhiana to Haldia. Monetary Measures Injected Liquidity Into The Banking system Since October 2008. Key Opportunities for Private Players Development of the Freight Corridor is the biggest opportunity in the sector. an increase in productivity and a reduction in unit transportation cost are the focus areas for the project. The total investment earmarked for the Railways in the 11th Five –year plan is Rs. It also reduced repo rates by 425bps to 4. We believe the ministry’s road building targets to be a bit too optimistic.75%.INDIA early this year (FY10). freight traffic is projected to cross 1. thereby injecting liquidity into the system. 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 expect greater participation from the private sector and the process of project awards to be expedited.100 million tonnes by the end of 11th Five Year Plan. given the following: • • A marked improvement in the Indian economy along with reviving global macro. however. With an estimated cost of Rs 500 billion (US$11 billion).000 kilometers of roads every year (20 km per day). ~30% is expected from private participation as against 20% in the 10th plan. 2. The role of private players is much more prominent in current central projects. covering about 2762 kms along two corridors. 71 . Now. The Transportation Ministry is targeting building 7. coupled with RBI monetary measures. Mumbai to Tughlakabad/Dadri. Softening of commodity prices. 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. along with interlinking of the two corridors at Khurja. These aggressive measures led to a significant improvement in the liquidity situation with wholesale interest rates declining sharply over the last nine months. The Indian Ministry of Railways plans to construct a new Dedicated Freight Corridor (DFC). have alleviated liquidity concerns to a great extent.000 kms. A softer interest rate regime leading to easier access to liquidity and a lower cost of debt. One-third of Planned Investment to Come From Private Sector Of the 11th Plan’s investment of Rs 20. The DFC has been further necessitated by growth of 8 to 11% in railway freight traffic over the last three years. 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%. the severe liquidity crisis hampered the ability of private players to generate funds required for investment. or a doubling of the 10th plan expenditure. the government is looking to involve private investment in some segments of the project.562B (close to US$500B at the time). In FY09. • Road Development We welcome the government’s recent efforts to increase spending on roads. and the Western Corridor. Upgrading transportation technology. but the fact that the focus remains on road buildout and improving the condition of existing roads is a positive. from Jawahar Lal Nehru Port.

6 billion in 2008.700MW. The planned outlay for power has been doubled in the 11th plan period to Rs 6. upgrades of technology from ground-based communication. with a total generation capacity of 150. navigation. Investment of Rs 310 Billion in 11th Plan Period The Financing Plan for Airports has estimated an investment of ~Rs 400 billion (US$8. 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.665 billion (US$145 billion). development of airspace capacity enhancement. and surveillance-air traffic management (CNS-ATM) to satellite-based CNS-ATM facilities. and peak shortfall ~12%. Softening commodity prices. 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. India’s power supply capability has always lagged behind its power demands with current total shortfall of ~8%. the major ports handle ~75% of India’s maritime cargo. Severe Demand–supply Mismatch India has been facing a demand–supply mismatch. not just at peak demand levels but also at the base level. Collectively. Lower interest rates.3% and states 33. reaching US$5. With healthy economic growth expected to continue over the next few years. with the central government expected to contribute 38.7 billion) over 2005–14. We believe the following prevailing factors to be positives for the sector: • • • • Healthy liquidity conditions. Power India is among the world’s largest power-producing and -consuming nations.323MW as of June 2009. 72 . infrastructure augmentation especially in the power sector is imperative. the Airports Authority of India (AAI) will undertake the development of 35 non-metro airports and 13 other airports. installation of safety and facilitation equipment.4mt of cargo per annum by 2010. given that the sector tends to be capital intensive. India’s civil aviation market has grown at a CAGR of 18%.1 billion) has been earmarked for ports in the 11th plan. Investment of Rs 880 billion (US$19. The key drivers of increasing demand are growth in household consumption. electrification of rural areas. During the 11th plan.9%. 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. the rapid growth of manufacturing and realization of demand suppressed due to load-shedding. Healthy political climate. The Centre for Asia Pacific Aviation (CAPA) has forecast a market of more than 100 million passengers along with ~3. installation of new facilities including security equipment at various airports.INDIA Airports Air passenger growth in India has been one of the highest in the world. and development of IT.

026 $8. have also given a major boost to the online travel market.02 8.762 257 $5.891 42 $0. the first real online catalyst came from the government-owned Indian railways which started offering online bookings back in 2005.006 59 $1.99 $955 $42. including air.2 1.6 10 4.2 1 55. The growth of LCCs.8 10 4. distributors and agencies.7 10 13. Pricing as of 12/03/2010.8 10 9. real-time basis.7 118 85 34 2. The India travel ecosystem consists of various industry suppliers. Surprisingly.5 10 25.134 $3. The entry of low-cost carriers (LCCs) transformed the marketplace in 2005.918 $426 52 Week Book P/BV EPS P/E High Low Value TTM 660 304 171 3.11 68. The fragmented nature of the travel industry has created an opportunity for distributors to capture value by developing and managing efficient systems that are capable of bridging travel supply and demand on a nationwide.92 1.5 179 115 49 2. and rail is seeing innovation.INDIA Travel Sector Major Players Company Cox & Kings Thomas Cook Indian Hotels Hotel Leela Venture Taj GVK Hotels Advani Hotels Pride Hotels Lemontree Hotels MMYT Yatra Cleartrip Via Ticker 533144-BOM 500413-IN 500850-IN 500193-IN 532390-IN 523269-IN Private Private MMYT Private Private Private International Travel House500213-IN Price Market Capitalization INR US$ (INR Crore) (US$Mill) 528 $11. The entire travel ecosystem in India. India’s Travel Market As recently as the mid1990s.241 45 $1.1 0 #DIV/0! 79 56 325 0.4 #N/A #N/A Source: FactSet.5 59 40 54 0.88 $20.585 $15. 73 .056 $457 95 $2. As consumers navigate online travel sites.1 601. While a majority of travel booking in India today is done the traditional way offline through a retail travel outlet.72 2. hotel. bus.808 136 $3.30 12.509 $1.73 36.431 $2.01 17.9 316 113 104 2. the Indian aviation and rail industries were government owned monopolies.260 $27. they dive into the online travel ecosystem. there are a growing number of online choices for consumers including supplier websites and online travel agencies (OTAs). OTAs.6 65 37 5 7. which have now grown from just a single one back in 2004 to seven in 2010.75 2.

18544billion. or US$118billion) in 2010 to 9.5% per annum over the coming 10 years. 0. 26. Real GDP growth for the travel & tourism section of the economy is expected to be 6. Further. the contribution of travel & tourism to GDP is expected to rise from 8. India is one of the fastest-growing countries in the world in terms of its travel and tourism industry.20 % Jet Airways. or US$330billion) by 2020. the WTTC expects that.30% Source: TRAI The Indian travel and tourism industry is large and growing rapidly.60% Go Air. According to the World Travel & Tourism Council (WTTC). 5.6% (Rs. India will become one of the top 10 travel and tourism markets in the world in terms of the absolute size of its market. 17. as a result of the strong growth rate in the Indian travel and tourism industry. 20% NACIL.5532 billion.3 0% Spicejet.7% in 2010 and to average 8.90% Kingfisher. Internet penetration levels remain abysmally low in India with current estimates putting it at a mere 7% (81 million users).0% (Rs.60% IndiGo. 13. 16. 74 . 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.

including Mumbai.7 billion has been earmarked for building new infrastructure facilities such as tourist reception centers and refurbishing monuments. Upgrade of existing or construction of new airports in major cities. Finland.7% increase over the previous year) of which about Rs. • • • • 75 . Hyderabad and Bangalore. 11. Netscribes has cited sources stating that. New Zealand. 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. The provision of one-month tourist visas on arrival for citizens of five countries (Japan. Delhi. Chennai. 4. the Indian online travel market grew 11% to reach $3. Support of an “open-skies” policy in India which has led to the rise in LCCs. in 2009. the non-air ticket segments are also growing in the Indian online travel market.4 billion in 2009. However. Per PhoCusWright. approximately 34% of air tickets and 14% of train tickets booked in India were sold online.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. Many travelers also utilize online travel agency websites for travel-related research and information. Online rail revenues grew in excess of 25% in 2008-2009. Singapore and Luxembourg). An expenditure budget of Rs. air ticket bookings contributed to approximately 70% of the online travel market in India in 2009.2 billion allocated to the Ministry of Tourism in the 2010 Indian government budget (a 9.

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

but we believe rising occupancies could now boost revenues and profits. Major sporting events such as the recently concluded Commonwealth Games in Delhi. improving infrastructure. 77 . Rising disposable incomes. 48% Yatra. cheaper airfares and better connectivity should continue to increase demand for rooms. The positive outlook of strong GDP growth. 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. 24% Source: PhocusWright & Oppenheimer & Co Hotel Industry FY10 was a challenging year for the hotel industry. 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.INDIA Exhibit 47: OTA Market Share in India as of 2009 Others. 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. 10% Cleartrip. 18% MakeMyTrip.

Rs. Rs. Not Rated) Maruti Suzuki (532500-IN. Not Rated) NIIT (500304-IN. Not Rated) Hotel Leela Venture (500193-IN. 1. Not Rated) Honda (HMC. Not Rated) Andhra Bank (532418-IN.6. 726. (532296-IN. 423. Rs.399. Not Rated) Bajaj Auto (532977-IN. Not Rated) Mindtree (532819-IN. 1. 1.020. 1.INDIA Stock prices of other companies mentioned in this report (as of 12/03/2010) Aditya Birla Nuvo (500303-IN.7. $145. Not Rated) Firstsour. 527. $38. 485.60. Not Rated) Cadila Health.9. Not Rated) HCL Technologies (532281-IN. 160. 2. Rs.0. 257.5. Rs.2. 168.7. 170.2. Rs. Not Rated) Canara Bank (532483-IN.288. 62. Rs.43. 45. Rs. 628. Rs. Rs.4. Rs. Rs. 48.392. Rs. Not Rated) Indian Hotels (500850-IN. Not Rated) GMR Infrastructure (532754-IN. Rs. Rs. 798. Not Rated) eClerx Services (532927-IN.81. 155.0. Not Rated) IDBI Bank (500116-IN.4. Rs. Not Rated) International Travel House (500213-IN.4. Rs. Not Rated) Larsen & Toubro (500510-IN. Rs. Rs. 745. 1.0. Not Rated) Bank of India (532149-IN.0. 129.832. Not Rated) IVRCL (530773-IN.5. Rs. Rs.3.5. Not Rated) IBN18 BROADCAST (532800-IN. Not Rated) ExlService Holdings (EXLS. 59.596. Rs. 90.9.7. Not Rated) Advani Hotels (523269-IN. Not Rated) Jubilant (530019-IN. Rs. Rs.826.80. 1. 373. Not Rated) IOB (532388-IN. Rs. Not Rated) Cox & Kings (533144-BOM. Not Rated) Educomp (532696-IN.2.4.69. Rs.7. Not Rated) Pantaloon Retail (523574-IN.0. Not Rated) Hero Honda (500182-IN. Rs. 500. Rs. 288. Not Rated) ICICI Bank (532174-IN. Not Rated) Kotak Mahindra Bank (500247-IN. Rs. Not Rated) Glenmark Pharma. Not Rated) Axis Bank (532215-IN. 2. Rs. 93. Not Rated) BHEL (500103-IN. Rs. Not Rated) Ashok Leyland (500477-IN. Not Rated) Ford (F. Not Rated) Lupin (500257-IN. Rs. (532809-IN.6. Rs.8. Rs. 241. Rs. Rs. Not Rated) HDFC Bank (500180-IN. 88. Not Rated) Mundra Ports (532921-IN.5. Not Rated) Dr Reddy's Labs (500124-IN. Rs. 21.7.8. 94.6. Not Rated) Aurobindo Pharma (524804-IN.0. Not Rated) Lanco Infratech (532778-IN.6.9.5. 370. Rs.1.6. Rs.Solu. (532321-IN. 2. 149. 1. Rs. 291.4. 72. Rs. $14. Rs. Not Rated) Hexaware Tech (532129-IN.182.209. Not Rated) Exide Industries (500086-IN. Rs.7.8. 146. Not Rated) Everonn Systems (532876-IN. Not Rated) 78 . Rs. Rs.5.2.0.409. $63. Not Rated) Cipla (500087-IN.5. Not Rated) NDTV (532529-IN. Not Rated) Core Projects (512199-IN. 402. Not Rated) Genpact (G. 569. 496. Not Rated) IndusInd Bank (532187-IN. Rs.8. Not Rated) Max India (500271-IN. 41. $16. Not Rated) Hyundai (005380-KRX. Not Rated) Mahindra & Mahindra (500520-IN. 480. $21.3. Not Rated) BMW (BMW-ETR. Rs.4. 770. 728.20. Rs.7.9.8.

Not Rated) Satyam Computer (500376-IN.314. Not Rated) Zee Entertainment (505537-IN.8. Rs. 2 photo: Oppenheimer & Co. 441.3. Not Rated) WNS Holdings (WNS. Rs. Not Rated) Vishal Info. Rs. 79 . $12. Rs. 667.095.071. Rs.4. 64. Rs.1. Rs. (500420-IN. Rs. $79.5.9. 72. Rs.4. (533011-IN. Not Rated) Toyota Motors (TM.INDIA Patel Engineering (531120-IN.5. Not Rated) Unichem Labs. Rs. $114.Tec. Not Rated) Swaraj Mazda (505192-IN. Not Rated) SBI (500112-IN. 1. 708. 157.5. Rs. Not Rated) Volkswagen (VOW-ETR. Not Rated) Torrent Pharma. Rs. 1. Rs. 64.9. 136. 358. 248.3. Rs.1.9.3.7. Rs. Rs. 331. Not Rated) PNB (532461-IN.7. 105. Not Rated) Television Eighteen (532299-IN.5.7. 428.2. Not Rated) Sun TV (532733-IN. 727.0. (500359-IN. 1. Not Rated) Tata Motors (500570-IN. 573. Rs. 447. Rs.5.2. 4. (524715-IN.76. Rs.80. (532254-IN. 330. Not Rated) Ranbaxy Labs. Not Rated) Wockhardt (532300-IN. Rs. Not Rated) TCS (532540-IN. 147. Not Rated) Piramal Health (500302-IN. Rs. Rs.05. 567.5. 411. 520. Not Rated) Tech Mahindra (532755-IN.0.7. Not Rated) Provogue India (532647-IN. 3. 135. Rs.5. Not Rated) Syndicate Bank (532276-IN. Not Rated) Taj GVK Hotels (532390-IN. Not Rated) Patni Computer (532517-IN. Not Rated) Sun Pharma.8. Rs. Rs. Rs. Rs. 466. Not Rated) Source for p. Rs. Not Rated) Shopper's Stop (532638-IN. Not Rated) Punj Lloyd (532693-IN. 58. Rs. Inc.Inds. Not Rated) Wipro (507685-IN.2. Not Rated) Polaris Soft. Not Rated) Yes Bank (532648-IN. (506690-IN.4.272. Not Rated) Thomas Cook (500413-IN. Not Rated) Reliance Capital (500111-IN.

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

2008: Outperform(O) . Oppenheimer & Co. Attention: Equity Research Department. New York.to. Oppenheimer & Co. 2004. 12. please write to Oppenheimer & Co. Prior to March 30.Stock expected to outperform the S&P 500 within the next 12-18 months. 81 . Inc. used 6-. 12-..to 24-month price targets and ranges. Business Manager. Inc. Rating System as of January 14th. Inc. and 12. 300 Madison Avenue.18-month period. For more information about target price histories. NY 10017.to 18-.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.

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

Inc. NY 10017. This report is provided.Oppenheimer & Co. opinions and recommendations expressed herein constitute judgments as of the date of this report and are subject to change without notice. and no representation or warranty.com or write to Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. All estimates. The analyst writing the report is not a person or company with actual. but Oppenheimer & Co. Each such address or hyperlink is provided solely for the recipient's convenience and information.All information. New York. 83 . Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. is made regarding future performance of any security mentioned in this report. does not represent that any such information. Since the levels and bases of taxation can change. Before making an investment decision with respect to any security recommended in this report. Business Manager. and the content of linked third party web sites is not in any way incorporated into this document. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates. implied or apparent authority to act on behalf of any issuer mentioned in the report. Inc. accepts no liability for any loss arising from the use of information contained in this report.. and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited.INDIA Additional Information Available Please log on to http://www. or individual research analysts). Inc.Nothing in this report constitutes legal. Inc. for informational purposes only. the recipient should consider whether such recommendation is appropriate given the recipient's particular investment needs.opco. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Inc. objectives and financial circumstances. 2010. including the loss of investment principal. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein. Copyright © Oppenheimer & Co. financial situation or specific needs of any particular client of Oppenheimer & Co. opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable. except to the extent that liability may arise under specific statutes or regulations applicable to Oppenheimer & Co. and they should not be relied upon as such. Inc. accounting or tax advice. The securities mentioned in this report may not be suitable for all types of investors. This report or any portion hereof may not be reprinted. As with any investment having potential tax implications. or contain hyperlinks to. express or implied. clients should consult with their own independent tax adviser. Inc. Attention: Equity Research Department. and encourage investors to seek the advice of a financial advisor. sold. This report does not take into account the investment objectives. and investors may realize losses on investments in such securities. We recommend that investors independently evaluate particular investments and strategies. a member of all Principal Exchanges and SIPC. Inc. Other Disclosures This report is issued and approved for distribution by Oppenheimer & Co. any reference in this report to the impact of taxation should not be construed as offering tax advice on the tax consequences of investments. as a substitution for the exercise of independent judgment of the merits and risks of investments. Oppenheimer & Co. opinion or statistical data is accurate or complete (with the exception of information contained in the Important Disclosures section of this report provided by Oppenheimer & Co. if any. 300 Madison Avenue. Internet web sites. Inc. or redistributed without the written consent of Oppenheimer & Co.Past performance is not a guarantee of future results. Oppenheimer & Co. to institutional and retail investor clients of Oppenheimer & Co.. Inc.This report may provide addresses of.

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