India - Make in India - Laying Out The Playing Field

EQUITY RESEARCH | September 21, 2020 | 7:39 PM IST
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Make in India
India has announced several measures aimed at self-reliance including import disincentives,
8bd945a2aae711ddbe450014c24035ec
production-linked incentives, tax benefits and digitization in an attempt to increase the share of
manufacturing in GDP from 17% currently to 25% over the medium term. These policies will cater to
satisfy the large domestic demand initially; but with the right enablers, in our view, could potentially
serve global efforts in seeking out a China + 1 sourcing strategy. While follow-through and successful
implementation of these steps remains critical, sectors like Industrials, Defence, Autos and
Pharmaceuticals are likely to be at the forefront of this initiative. This report captures the steps taken
so far and highlights the potential beneficiaries as India lays out the playing field.
Pulkit Patni Shyam Srinivasan, CFA Prachi Mishra Pramod Kumar Sumeet Jain
+91 22 6616-9044 +91 22 6616-9346 +91 22 6616-9052 +91 22 6616-9043 +91 22 6616-9160
pulkit.patni@gs.com shyam.srinivasan@gs.com prachi.mishra@gs.com pramod.kumar@gs.com sumeet.x.jain@gs.com
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investment decision. For Reg AC certification and other important disclosures, see the Disclosure
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Goldman Sachs India
Table of Contents
Make in India: Sector snapshot 5
PM Summary: Early steps towards self-reliance 7
What is “Atmanirbhar Bharat”? 12
Macroeconomic implications of “Atmanirbhar Bharat”: Execution remains the key 19
Industrial: Air conditioners and defence equipment to lead localisation 28
Autos and auto ancillaries: The best Make in India story has a long runway for localization 44
Consumer: Apparel exports could be a large opportunity with the right incentives 47
Pharma: API opportunity is large and seeing global tailwinds 53

IT/SaaS: Large talent pool and scale of IT services industry, harbinger for SaaS growth ahead 59
TMT: Smartphone manufacturing to get incremental push 67
Logistics: A key enabler for Make in India 69
TP methodologies & risks 73
Disclosure Appendix 74
21 September 2020 2
Goldman Sachs India
We see the “Make in India” (MII) initiative potentially having a profound impact on
India’s economy. Plans to make India more self-reliant could see the share of
manufacturing in GDP rise from 17% to 25% over the next few years, creating 100mn
new jobs. Knock-on impacts could see India better develop its consumption potential,
boosting earnings for domestic companies over time.
In a scenario of full implementation, our Macro team expects real GDP growth to pick
up to 8% in the next five years, vs their base case of 5-6%. The team does not bake full
implementation of MII into their numbers, given the undoubted challenges:
improvements in manufacturing competitiveness, implementation of production-linked
incentive (PLI) schemes, better infrastructure, reforms in labour/land laws, more private
sector participation, continued political will, and growth in exports. In a recent note, the
team noted that Vietnam and India were the most mentioned destinations as alternates
to China for manufacturing.
Steps so far on logistics have been positive, like the construction of the Dedicated
Freight Corridor, the national road network scheme (Bharatmala), and connecting ports
to hinterlands (Sagarmala). Dedicated PLI schemes for the pharma sector and mobile
phones are backed by budgets exceeding INR500bn (0.3% of FY21 GDP) over 5-8 years.
Implementation of such PLI schemes, and crucially their potential extension to other
sectors, will be key for investors to watch out for.
This report expands on recent work done across the sectors mostly likely to benefit
from the MII initiative: pharma, air conditioners, autos, as well as defence, apparel,
IT/SaaS, mobile phones and logistics. We highlight 19 potential beneficiaries within our
coverage from the Make in India theme and associated government schemes, among
which some key Buy calls include Divi’s (on CL), TVS Motor, Adani Port and SEZ, L&T
and Tech Mahindra (on CL). As part of our overall industry analysis, we also look at a
number of Not Covered companies in these sectors that could have potential exposure
to the MII theme.
We would like to thank the following people for their contribution to this report: Deepak
Krishnan, Chandramouli Muthiah, Anubhav Bajpai, Aditya Gupta, Saurabh Thadani and
Rishabh Gupta.
Unless otherwise stated, pricing is based on Sep 18th close.
21 September 2020 3
21 September 2020
Goldman Sachs
4
India
Exhibit 1:
21 September 2020
Goldman Sachs
Make in India: Sector snapshot
5
India
Goldman Sachs India
Exhibit 2: Industrial, Autos, Pharma and Defence sectors beginning to see traction with Make in India;
opportunities exist in IT Services, TMT and Consumer
Sector Industrial Autos Pharma Defence IT Services TMT Consumer
Sensitivity to Make in
Overall ++ ++ ++ ++ + + +
India
Cost competitiveness
+ - - ++ ++ - -
vs China/Other EMs
Competitiveness
Capacity
++ ++ ++ -- ++ -- +
(capability / talent)
Size of domestic
++ +++ ++ +++ + ++ ++
market
Domestic and Export Current dependency

market --- - - --- +++ --- +
on Imports
Export Opportunity ++ ++ ++ + ++ ++ +
Subsidies/PLI
Schemes/Other + ++ + + - ++ -
Reforms
MII reforms
Import ban/tariff
announced by + ++ ++ ++ - ++ -
Government hikes
Progress made so far + ++ + + - ++ -
Divi's Labs,
Maruti, TVS, Bajaj TCS, Tech ABFRL, Page
Covered companies Voltas, Havells
Auto, M&M, Bosch
Aurobindo, Sun L&T, BHEL
Mahindra Industries
Potential exposure to Pharma
the MII theme and
associated
government schemes
Not covered Dixon, Amber, Blue Bharat Forge, Aarti Drugs, HAL, BEML, BDL, Sterlite
- Arvind Ltd, Trent
companies Star Endurance, Varroc Alembic, Solara BEL Technologies
Highly Favorable/
+++ Low dependancy + Slightly Favorable -- Unfavourable
Slightly unfavorable/
++ Favorable - Immaterial --- Unfavourable
Source: Goldman Sachs Global Investment Research
21 September 2020 6
Goldman Sachs India
PM Summary: Early steps towards self-reliance
“Atmanirbhar Bharat” (or Self-reliant India) is the vision of Prime Minister Modi to attain
self-reliance. This, along with the Government’s Make in India initiative, could be a key
investment theme over the next few years.
India Macroeconomics: n Our macroeconomics team believes that several of the initiatives under the
Prachi Mishra and
“Self-reliant India” program appear small in magnitude from a macroeconomic
Jonathan Sequeira
perspective; however, if these could be well-executed and lead to positive spillover
effects, we could see some boost to manufacturing and growth. There could,
however, be offsetting negative effects as well, eg, from higher tariffs. In a scenario
where there are vast improvements in manufacturing competitiveness, successful
implementation of the production-linked incentive schemes, complemented with
improvements in infrastructure, as well as in labour and land laws, greater
participation of the private sector, and higher exports, real GDP growth could pick up
to 8% pa over the next five years, vs our base case estimate of 5-6%. We do not
bake these developments into our economic forecasts for now, given the early stage
of the proposals as well as the execution challenges we foresee at this point.
We think the start has been good, with new policies on PLI in Pharma and Mobile
phones. In this report, we delve deeper into our broader India coverage and look for
potential beneficiaries of the theme of integrating global with local.
India Industrials and n Air conditioners and defence: As India’s AC penetration could increase to 72% by
Utilities: Pulkit Patni
FY25 from 49% in FY16 (from an affordability matrix penetration perspective), we
think large branded players like Voltas (Buy, on CL), with a quarter of market
penetration, and some sub-contract manufacturers will benefit from the theme of
import substitution. With 55% of AC components being imported, imposition of
higher import duties in the near term may hit industry profitability; however, phased
implementation may help create domestic manufacturing capability. We think this
will drive consolidation in the domestic market and also offer export opportunities.
For a detailed report on this topic refer to our 16 July report.
While there are various bottlenecks in domestic manufacturing of defence
equipment, including lack of technology and prolonged administrative procedures,
we think recent moves of allowing increased FDI ownership in the sector (up to
74%) and banning 101 weapons and military platforms from imports have been
steps in the right direction. L&T (Buy) among the stocks we cover could benefit
from this over the medium term;
India Pharmaceuticals: n Pharmaceuticals: We believe India’s Active Pharmaceutical Ingredients (API)
Shyam Srinivasan, CFA
manufacturers could benefit from Make in India friendly policies, as they serve a
large domestic market (US$9bn, growing 10% pa) while also leveraging on export
opportunities (US$4bn, growing high single digits pa), given the backdrop of
dual-sourcing requirements for global supplies. We see Divi’s (Buy, on CL) as
well-positioned to capture a growing share in contract manufacturing and API
supplies, as global pharma looks to diversify suppliers in a post-COVID world,
deepen relationships with established providers, and shift focus from pricing and
21 September 2020 7
Goldman Sachs India
more towards quality and reliability of supply. We also highlight Aurobindo Pharma
(Buy) and Sun Pharma (Sell). See our 22 July deep-dive on this sector.
India Autos: Pramod Kumar n Autos: At over 40% of India’s manufacturing GDP and with exports at c. 20% of
2W/car production, we see automobiles as one of the best Make in India story. The
industry imports c. US$15bn of components annually, making it a significant player
in the government’s import localization plans. Incremental localization will impact
component makers directly, in terms of top-line growth, while for OEMs, the benefit
is potentially lower costs, less FX volatility and faster time to market. With rising
tariffs / FX moves and geo-political headwinds, the industry is fast-tracking
localization plans, which could entail higher investments in the near / medium terms
but would strengthen the sector as a global hub for small cars, 2Ws and
components, in our view. Amongst our covered companies, TVS Motor (Buy),
Maruti (Buy), and Mahindra & Mahindra (Buy) benefit from the theme. For more
details on this topic see our concurrent report on India autos.
India Consumer: Aditya n Consumer: India is already the second-largest textile exporter and the sixth-largest
Soman
apparel exporter in the world. Despite low labour costs and a well-developed
cotton-textile-apparel supply chain, Indian garment manufacturing suffers from the
more dispersed and small scale of its manufacturing facilities. We see the
government’s recent move to remove anti-dumping duty on polyester raw material
in the FY21 budget as a positive move, as it allows better integration with global
supply chains. The government has also announced several incentives for small
industries and a US$200 mn investment for developing technical textiles in India.
Within our coverage, we note Aditya Birla Fashion & Retail (Buy) and Page
Industries (Sell) as key beneficiaries if more steps towards creating domestic
competitiveness in the apparel sector are taken.
India IT and IT Services: n IT/SaaS: IT spending in India is low, at just 1.9% of GDP, vs the global figure of
Sumeet Jain
2.9% and highs of 6.3%/5.4% of GDP in the UK and US, respectively. This implies
significant scope for increases in technology spending by Indian enterprises as they
adopt more digital tools. Over the past two decades, India’s IT services industry has
seen a strong 20% CAGR, growing from revenue of US$5.5bn in FY2000 to
US$191bn in FY2020, led largely by exports. Indian government incentives to the
industry around creation of SEZs (Special Economic Zones) with tax benefits helped
propel the growth in exports. Going forward, apart from export-driven growth, we
see Indian IT services companies participating pro-actively in India’s digital initiatives
(on areas such as GST Network, Taxation, Passports, MNREGA (the rural
employment plan), India Post, various large banks using IT services companies for
their core banking products, like SBI using TCS BaNCS, ICICI using INFY’s Finacle) as
well as around SaaS (Software-As-A-Service). India’s SaaS industry has witnessed a
29% CAGR over the past two years with total market size at US$3.5bn (in FY20),
and is expected to grow 6X by FY25E, as per NASSCOM. In 2019, the Government
of India approved the National Policy of Software Products to make India a big center
for software products by 2025 with primary focus on IP creation and up-skilling.
India’s large engineering talent pool is trained on various digital technologies; in our
view, this should be a key enabler for Make In India initiatives across industries.
Amongst our covered companies, we think Tech Mahindra (Buy, on CL) and TCS
21 September 2020 8
Goldman Sachs India
(Buy) could benefit from growth in domestic opportunities.

India Telecom: Manish n Telecom: The Government of India recently announced a Production Linked
Adukia, CFA
Incentive scheme (PLI) for manufacturing of electronics. This entails incentives of
4-6% on incremental sales (over base year FY20) of goods manufactured in India,
with up to Rs410 bn (US$5.5 bn) of incentives over five years. This could potentially
translate into >US$100 bn of incremental smartphone/electronics manufacturing in
the country over this period of five years. Per press reports, Samsung, and contract
manufacturers of Apple, such as Foxconn Hon Hai, Rising Star, Wistron and
Pegatron, have noted interest in this scheme. In addition, seven domestic firms have
applied for this scheme, with names such as Lava Group, Dixon Technologies,
Bhagwati (Micromax), among others. In addition, we note that the government is
also adopting the approach of levying additional duties on incremental imports of
certain products; for example, India recently levied a 10% safeguard duty on single
mode optical fiber in order to encourage domestic production.
India Industrial and utility: n Logistics – a key enabler: Various steps have been taken to improve logistics
Pulkit Patni
efficiency, like the construction of the Dedicated Freight Corridor, national road
network scheme (Bharatmala Project), connecting ports to hinterlands (Sagarmala
Project) etc. We see companies like Adani Port and SEZ (Buy) and Gujarat Pipavav
Port (Buy) (both port companies) and Container Corporation of India (Neutral),
India’s largest container train operator) as likely beneficiaries from increased
domestic manufacturing and import/exports.
In their latest publication, the ECS team concluded that there is no evidence of a
broad-based manufacturing move away from China. However, based on a survey of
equity analysts, Vietnam and India came out as the most mentioned destinations as
an alternate to China for manufacturing. Bangladesh and Cambodia were preferred
for Apparel, and Taiwan for Tech. Vietnam and India appear to be attractive to
manufacturers in multiple industries. They are followed by Indonesia, Mexico and
Thailand.
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Goldman Sachs India
Exhibit 3: Covered companies: Key beneficiaries of the MII theme and associated government schemes
Mkt. Cap Price (INR) Potential FY2022E
Company Rating upside / Comments
$ mn Current 12-m TP downside P/E (X) P/B (X) ROE EV / EBITDA
Industrials - Covered Companies

Defence
Defence business to benefit from potential submarine order near term and
Larsen & Toubro Buy 16,981 910 1,140 25% 15.2x 1.7x 11% 14.2x more defence procurement over the medium term. Other businesses could
be second derivative beneficiaries of Make in India
With Ministry of Defence banning imports of 101 items, PSUs could benefit
Bharat Heavy Electricals Sell 1,700 36 25 -30% 13.6x 0.4x 3% 7.4x
from higher local defence procurement
Logistics
Beneficiary of Western Dedicated Freight Corridor project expected to

Gujarat Pipavav Port Ltd. Buy 547 83 90 8% 11.7x 1.7x 15% 6.4x
complete in March 2021, with full commissioning expected in FY23
Beneficiary of Western Dedicated Freight Corridor project expected to

Adani Port and SEZ Buy 9,590 353 390 11% 14.6x 2.2x 16% 11.0x
complete in March 2021, with full commissioning expected in FY23
Benefits from dedicated freight corridor, tax reform and multi-modal logistics
Container Corp. of India Neutral 3,217 389 430 11% 24.3x 2.1x 9% 13.8x
parks. Market share of rail to improve
Air Conditioners / Electricals

Market leader with 26% share in Room ACs; 60% of top-line comes from
Voltas Buy* 3,051 679 680 0% 33.9x 4.4x 14% 28.9x
Room Acs
Havells India Neutral 5,687 671 560 -17% 54.9x 8.0x 15% 33.4x 17% of top-line from AC segment, which could benefit from Make in India
Pharmaceuticals
Aurobindo Pharma Buy 6,483 818 970 19% 12.1x 2.0x 18% 7.4x High overlap on list of 53 APIs earmarked by govt for localization
Divi’s Labs Buy* 11,482 3,186 3,600 13% 36.0x 7.8x 23% 24.8x Price cap removal for domestic customer base if API sourced locally
Sun Pharmaceutical Industries Sell 16,198 506 380 -25% 25.0x 2.4x 9% 15.1x High overlap on list of 53 APIs earmarked by govt for localization
Automobiles
Aims to reduce ~15% import exposure, led by electronic components and
TVS Motor Buy 2,938 455 540 19% 25.0x 5.0x 21% 13.1x
advanced parts, by 2% per year
KTM 350cc and below portfolio Made in India - 45% of revenue coming from
Bajaj Auto Neutral 11,555 2,941 3,183 8% 14.8x 3.7x 26% 13.1x
exports
Benefits from local sourcing of defense (mobility, aircraft and radar systems).
Mahindra & Mahindra Buy 10,358 614 698 14% 19.4x 1.9x 10% 10.9x M&M-Ford JV to localize and build compact SUVs for domestic and export
markets
Aggressive localization plan for non-electrical parts underway - has ~15%

Maruti Suzuki India Buy 28,921 7,051 6,763 -4% 31.3x 3.8x 13% 22.5x
import exposure on electronics and steel
Working towards localization of parts and technologies used for BS6 and
Bosch Ltd. Sell 5,572 13,070 9,219 -29% 30.6x 3.8x 12% 21.9x
EVs in India
Consumer
More economical sourcing from localization initiatives and larger potential
Aditya Birla Fashion and Retail Buy 1,407 134 171 28% 37.1x 7.1x 21% 6.7x
export opportunity
Page Industries Ltd. Sell 2,859 18,877 12,119 -36% 53.4x 18.9x 39% 33.9x Labor reform driving better outcomes
IT Services
Tech Mahindra Ltd. Buy* 9,384 791 954 21% 13.7x 2.5x 19% 7.7x Working with govt on smart city projects and cloud services
Highest market share in domestic India IT Services market. Involved in
Tata Consultancy Services Ltd. Buy 126,878 2,490 2,598 4% 25.5x 10.5x 41% 18.0x
government digitization (Passport, MNREGA, India Post)
* On Conviction List. Pricing as at 15 September, 2020
Source: Datastream, Goldman Sachs Global Investment Research
21 September 2020 10
Goldman Sachs India
Exhibit 4: Not Covered (NC) companies with potential exposure to the MII theme and associated government schemes
Mkt. cap Price (INR) FY2022
Company Rating Comments
$ mn P/E (X) P/B (X) ROE EV / EBITDA
Industrials
Air Conditioners / Electricals
Blue Star Limited NC 913 700 35.8x 7.5x 21% 19.7x Similar to Voltas, Blue Star gets 50% of revenue from room AC business
Whirlpool of India Limited NC 3,835 2,227 42.2x 8.0x 21% 30.3x Multi-product company; small portion of top-line comes from the AC segment
Johnson Controls Hitachi Air Conditionin NC 851 2,306 47.9x 6.8x 16% 27.8x Pure-play cooling company
Dixon Technologies (India) Limited NC 1,572 9,997 43.7x 11.0x 27% 25.4x One of the biggest contract manufacturers of electronics
Amber Enterprises India Ltd. NC 945 2,065 30.1x 4.2x 15% 15.0x Largest contract manufacturer for room ACs
Defence
BEML NC 366 647 20.6x 1.2x 6% 11.2x Potential exposure to higher local defence procurement
Bharat Electronics Limited NC 3,467 105 14.1x 2.3x 16% 6.3x Potential exposure to higher local defence procurement
Hindustan Aeronautics Limited NC 3,825 841 15.0x 2.1x 15% 9.0x Potential exposure to higher local defence procurement
Bharat Dynamics Limited (BDL) NC 775 311 14.3x 2.5x 18% 6.1x Potential exposure to higher local defence procurement
Pharmaceuticals
Aarti Drugs NC 937 2,963 29.8x 10.6 26% 17.6x Number of intermediates and APIs covered under PLI scheme
Solara Active NC 488 1,004 18.7x 3.3 11% 12.3x Looking to improve economics on relevant APIs through PLI scheme
Alembic Pharma NC 2473 927 19.7x 5.7 20% 14.2x Exposure via faster clearance of API capacity expansion
Automobiles
Bharat Forge NC 3,014 477 33.1x 4.3x 12% 17.8x Diversified presence in defence verticals
Endurance Technologies NC 2,157 1,129 24.9x 5.3x 17% 12.6x Localizing low-cost ABS systems and disc brakes
Varroc Engineering NC 578 316 18.2x 1.4x 8% 6.1x JV with Dell’Orta to localize supply of Fi units for 2Ws
Consumer
Arvind Limited NC 112 32 4.3x 0.3x 7% 4.8x Exposure to factors supporting textile exports
More economical sourcing from localization initiatives and larger potential
Trent NC 3610 748 99.0x 11.1 10% 44.1x
export opportunity
Telecom, Media & Technology
Sterlite Technologies NC 845 157 12.5x 3.2x 21% 7.0x Exposure via a 10% increase in safeguard duty on single mode optical fiber
Notes: Valuation numbers based on I/B/E/S Consensus. Pricing as at 15 September, 2020. The list of Not Covered (NC) companies shown above is not exhaustive, with inclusion based on a range of
factors such as: revenue exposure, market share, product offerings/capacity, etc. (see individual sector discussions for more detail).
Goldman Sachs India
What is “Atmanirbhar Bharat”?
The Make in India initiative was launched by Prime Minister Modi in September 2014,
with the objective to transform India into a global design and manufacturing hub. In
addition, in May 2020, an economic package of Rs20tn to tide over the Covid-19
pandemic under the title “Atmanirbhar Bharat Abhiyan” (or Self-reliant India) was
announced. The economic package was targetted to play an important role in making
India “self reliant” and to benefit labourers, farmers, MSMEs and cottage industries.
The key objectives of the Make in India scheme are as follows:
n An increase in the share of manufacturing in the country’s GDP from 16% to 25%
by 2022;
n To create 100mn additional jobs by 2022 in the manufacturing sector;
n Creation of appropriate skills among rural migrants and the urban poor;
n An increase in domestic value addition and technology in manufacturing;

n Enhancing the global competitiveness of India’s manufacturing sector; and
n Ensuring sustainability of growth, particularly with regard to the environment;
While the progress has been slow and these targets are unlikely to be met by 2022, we
believe the additional push given to the initiative over the last few months – such as the
PLI scheme announcement and import restrictions on various products – will expedite
the implementation from hereon in. Between 2000 and 2010, China’s manufacturing
GDP grew by 13% annually. Bangladesh and Vietnam have both increased their GDP
share of manufacturing by 5-6% pp in the past 10-12 years. India on the other hand, as
seen in the exhibit below, has seen manufacturing as a % of GDP remain in the 16-18%
range over a prolonged period of time i.e. no increase over the last 10-12 years.
The other focus of the Make in India programme is on creating jobs and skills
enhancement in 25 sectors:
Goldman Sachs India
Exhibit 5: Make in India focus sectors

List of focus sectors for Make in India
Automobiles Mining
Automobile Components Oil and Gas
Aviation Pharmaceuticals
Biotechnology Ports and Shipping
Chemicals Railways
Construction Renewable Energy
Defence Manufacturing Roads and Highways
Electrical Machinery Space and Astronomy
Electronic Systems Textiles and Garments
Food Processing Thermal Power
IT and Business Process Management Tourism and Hospitality
Leather Wellness
Media and Entertainment
Source: Data compiled by Goldman Sachs Global Investment Research
A strong manufacturing sector is critical for a country like India, in our view, with its
huge employable workforce. We expect Make in India to boost the share of
manufacturing in India’s GDP, which has lagged in the past few years.
Exhibit 6: Over the past decade, manufacturing has accounted for Exhibit 7: Over the past decade manufacturing growth has slightly
roughly 16-18% of India’s GDP lagged overall GDP growth
25,000 18.5% 14%

10 yr CAGR:
18.0% 12%
20,000 Total GVA: 6.4%
17.5% 10% Manufacturing GVA: 6.2%
15,000 17.0% 8%
10,000 16.5% 6%
16.0% 4%
5,000
15.5% 2%
0 15.0% 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Manufacturing GVA (Rs bn) Manufacturing (% of total GVA) Manufacturing (YoY Growth) Total GVA (YoY Growth)
Source: MOSPI Source: MOSPI
Rationale for a Make in India push: Over the past decade, India has been running an
expanding trade deficit, due in large part to burgeoning imports of merchandise
(manufacturing sector). India’s merchandise imports are at 19.1% of GDP in FY20, the
highest among comparable emerging economies. The need to import more merchandise
has also been partially caused by a domestic manufacturing sector which has lagged
overall GDP growth in recent years. While India has done a decent job on exports in
Chemicals, Textiles, Jewellery and Petroleum products, we see room for improvement in
categories like Electronics items, Transport equipment and Machinery.
Also, from an employment point of view, the urban mass has been the most important
consumer segment over the past four years. Urban blue collar workers, which is a
significant category in population size, has been a laggard in terms of wage growth.
Make in India could be a very significant opportunity for this cohort as they form 22% of
Goldman Sachs India
the working population but have barely witnessed any growth in wages over the last
few years.
Exhibit 8: India’s merchandise imports have substantially exceeded its merchandise exports over the last
decade
400 400
300 300
200 200
100 100
0 0
-100 (34) (100)
-200 (119) (129) (112) (200)
(144) (159) (158)
(181)
-300 (300)
-400 (400)
-500 (500)
-600 (600)
2005 2010 2015 2016 2017 2018 2019 2020
Merchandise Exports ($bn) Merchandise Imports ($bn) Deficit ($bn)
Source: RBI
Exhibit 9: India’s merchandise imports (as a % of GDP) are the Exhibit 10: India’s merchandise exports largely consist of
highest amongst comparable emerging economies and China - Chemicals, Textiles, Jewellery and Petroleum Products - CY2019
CY2019
20% 19.1%
Others, 14% Chemicals, 14%
18%
16% 15.3% 15% 14.5% Electronic Items,
14% 4%
12% 10.9%
10.0% Transport
10% Equipment, 8% Petroleum, 13%
8%
6% Metals, 8% Gems &
4% Jewellery,
Agri, 8% 11%
2%
Textiles,
0%
11%
India Indonesia Russia China Argentina Brazil
Machinery, 9%
Merchandise Imports (% of GDP)
Source: World Bank Source: DGCI
Goldman Sachs India
Exhibit 11: Urban blue collar workers, at 22% of the working population, could get a big boost if domestic manufacturing is promoted
Indian consumer cohorts
India Consumer Cohorts FY2021E FY21-26 CAGR FY2026E
Cohorts Working Income Working Income Working Income

population ($) population population ($)
(mn) (mn) (mn)
Movers and Shakers 0.5 297,582 4% 6% 0.6 460,589
Government/SOE employees 10 19,484 -1% 7% 9 27,473
Urban white collar 21 13,249 3% 6% 24 19,577
Educated urban mass 39 6,407 4% 5% 46 9,467
Urban blue collar/migrant workers 121 3,101 4% 6% 147 4,800
Rural land owners 118 2,281 -1% 6% 112 3,347
Rural Labour 165 972 2% 4% 182 1,107
Rural emerging 87 480 -1% 4% 82 539
Total/wtd avg. 559 3,030 2% 8% 603 4,554

Exhibit 12: Urban blue collar segment has witnessed a decline in tax
filings which could reverse with higher manufacturing growth
Income from salaries CAGR (FY13-18)
Movers & Shakers
Urban white collar
Educated urban mass
Urban blue collar
-0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4%
Growth in salaried people tax filing (CAGR FY13-18)
NITI Aayog Export Preparedness Index (2020) identifies key export support factors
One of the key objectives of Make in India (MII) is to promote exports. The NITI Aayog’s
(which is the Government’s planning body) August 2020 report on Export Preparedness
assesses regional capabilities and policy or infrastructural gaps which if plugged can
enable more effective export performance in a number of states.
As visible in the below exhibits, Gujarat, Maharashtra, Tamil Nadu, Rajasthan and
Odisha are the Top 5 states in terms of Export preparedness. The bottom half of states
on this scale have potential to catch up if the following policy / infrastructure tools can
be enhanced according to the report:
n Trade support;
n R&D Infrastructure;
n Access to finance;
n Export Infrastructure;
Goldman Sachs India
n Growth and Orientation; and

n Industrial Framework
Sectors like electronics, capital goods, chemicals, textiles and apparel, auto and auto
components and pharmaceuticals contributed to more than half of global trade in 2018.
India’s share of exports in these sectors is in low single digits, which could change if
manufacturing competitiveness is improved.
Exhibit 13: Heatmap of Export Preparedness Scores for Indian Exhibit 14: More focus on Trade support, R&D Infrastructure,
States / Union Territories Access to finance can support better export preparedness
Niti Aayog Country-Level Analysis of Export Preparedness

Index
Trade Support 16.9

Growth and Orientation 18.0
R&D Infrastructure 23.4
Industrial Framework 34.7
Access to Finance 35.5
Export Infrastructure 38.2
Business environment 44.6

Export Promotion Policy 44.9
Infrastructure 51.1
Transport Connectivity 53.7
Export Diversification 55.0
0.0 10.0 20.0 30.0 40.0 50.0 60.0
Source: NITI Aayog Export Prepredness Index 2020 Higher number represents better preparedeness in those areas
Source: NITI Aaayog Export Preparedness Index 2020
Goldman Sachs India
Exhibit 15: Gujarat, Maharashtra, TN, Rajasthan and Odisha top Export Preparedness Index for Indian States / Union Territories
Niti Aayog Export Preparedness Index 2020

80
75 75
70
65
63
60 57 58
55 56 56
54 54
49
50 48 48
46
41 41
39 40
40
36
34 35
30 28 29 30
26 27
22 22 23
19 21
20 18
12 12 13
10
Source: NITI Aayog Export Preparedness Index 2020
Goldman Sachs India
Exhibit 16: State-wise average number of export destinations

Source: DGCIS, NITI Aayog
Goldman Sachs India
Macroeconomic implications of “Atmanirbhar Bharat”: Execution remains

the key
Prachi Mishra This section has been authored by our India Economics team
+91 22 6616 9052
“Atmanirbhar Bharat” (or Self-reliant India) is the vision of the Prime Minister of India of
prachi.mishra@gs.com making India a self-reliant nation. The first mention of this came during the
Goldman Sachs India SPL announcement of the Covid-19-related economic package of INR 20 trn (~10% of GDP)
in May. Our understanding of the narrative so far is that the idea of “Self-reliant India” is
essentially composed of four elements, which we discuss below.
Jonathan Sequeira
+852 2978-0698
1. Corporate tax cut
jonathan.sequeira@gs.com The first initiative – one that was introduced last year – is lower corporate tax rates, with
Goldman Sachs (Asia) the goal to make the Indian economy more competitive and attract higher investment.
L.L.C. On 20 September 2019, India’s Finance Minister announced a cut in corporate income
tax rates to 22% (from 30% previously) and to 15% (from 25% previously) for newly
incorporated manufacturing firms. This announcement takes India’s corporate income
tax rates to among the lowest across peer emerging markets, and more generally
compared to regions across the globe (Exhibit 17).
Exhibit 17: India’s new corporate tax rate among the lowest across
the globe
Percent Percent
35 35
30 Median Corporate Tax Rate 30
25 25
20 20
15 15
10 10
5 5
0 0
Emerging &
Commonwealth
India (New)
Latin America
Euro Area
Sub-Saharan
India (Old)
Other Advanced
Developing Asia
Middle East &
European Union
Developing
Economies
of Independent
& Caribbean
North Africa
Emerging &
Economies
(excl. Euro
Africa
States
Area)
Source: World Bank, Goldman Sachs Global Investment Research
In an earlier report we provided an overview of the academic research literature on the

impact of a change in corporate tax rates, with a focus on emerging and developing
markets, and analyzed the implications for India. Our point estimates using Indian data
suggested that a 1 pp cut in tax rates would be associated with 0.4 pp higher real GDP
growth after two years. The confidence bands, however, were too wide for us to have
any reasonable degree of confidence for these point estimates to be statistically
distinguishable from zero. Our findings were broadly consistent with the international
evidence. Moreover, discussions with companies suggested that they would prefer to
remain with the old system for a while, taking advantage of the Minimum Alternate Tax
(MAT) and the exemptions. Indeed, the effects on investment and in turn, growth, so far,
have been smaller than what the headline cut in tax rates might imply. The recently
Goldman Sachs India
released RBI annual report 2019-20, for example noted that “The corporate tax cut of
September 2019 has been utilised in debt servicing, build-up of cash balances and other
current assets rather than restarting the capex cycle. These underlying developments
suggest that the appetite for investment is anaemic and in need of more reforms.“
2. Production Linked Incentive (PLI) schemes

The second initiative involves the introduction of a host of production subsidies, which
could fall under the broader umbrella of “industrial policy”. The schemes announced so
far have focused on two sectors: (i) electronics, and (ii) pharmaceuticals. The PLI
schemes would essentially entail a lump-sum transfer to new businesses to be
implemented over the next 5-8 years, with a total outlay envisaged at INR 513 bn (0.3%
of FY21 GDP).
At the outset, the PLI schemes announced so far do not appear to be large in
magnitude. Importantly, the program, to our understanding, does not address the
availability of start-up funds or capital, which is often a key barrier for individuals starting
new businesses. In addition, the subsidies are envisaged to be proportional to
incremental sales, and may not reduce the underlying uncertainties regarding future
cash flows, which is another major hurdle to start new businesses. Overall, it appears
that while the schemes could influence existing players to add and expand capacity, the
effects on stimulating new entrepreneurial ventures seems unclear. The details of the
schemes and the timeline for implementation are summarized in Exhibit 18.
Yet, whether these schemes have other spillovers and succeed at the margin to
incentivize greenfield investment and growth in selected sectors in the medium term
would depend crucially on finer details, and the execution of the program - e.g. how
much is the demand for the subsidies, how bureaucratic the processes to get the
lump-sum transfers are, how long it takes to actually transfer the funds, whether the
schemes are extended to other sectors, etc.
Exhibit 18: PLI schemes involve providing lump-sum transfers to new businesses over the next 5-8 years
Amount Incentive rate on incremental sales over base
Sector Goals Timeline Eligibility Base year
(INR bn) year
Promote local Fermentation Based Drugs: 20% for (FY24 - FY27),
manufacturing for 6 years: FY23- 15% in FY28 and 5% in FY29 Greenfield investment: Yes
69 FY20
53 critical bulk FY28 Chemical Synthesis Based Drugs: 10% for six years Min. Investment Threshold:Yes
Pharmaceuticals drugs (FY23 - FY28)
Greenfield investment: Yes
5 years: FY22
Medical Devices 34 5% for FY22 - FY26 Min. Investment Threshold:Yes FY20
- FY26
Incremental Sales Threshold:Yes
Large Scale - 6% for FY21-FY22 Greenfield investment: Yes
5 Years:
Electronics Electronics 410 - 5% for FY23-FY24 Min. Investment Threshold:Yes FY20
FY21 - FY25
Manufacturing - 4% for FY25 Incremental Sales Threshold:Yes
Source: Ministry of Chemicals and Fertilizers, Ministry of Electronics and Information Technology (MeitY)
3. Higher tariffs and embargo on imports of some goods

The third initiative is through protectionist policies in the form of higher tariffs on
imported goods in selected sectors. 370 manufacturing products across several sectors
– mainly chemicals, electronics, machinery, furniture, and toys – were identified by the
government back in December 2019 to be targeted for higher tariffs; however, none of
these have been implemented yet. These higher tariffs are envisaged to cover all trading
partners – although we would note that China is a major source of imports into India for
Goldman Sachs India
these selected product categories (Exhibit 19). The government also announced a ban
on imports of 101 defense items, to be gradually implemented from Dec 2020-2025, and
announced plans to float contracts worth INR 4 trn for domestic manufacturing of
banned products in the next 5-7 years. Our calculations suggest that even if these
higher tariffs were implemented, the impact on overall imports, and on the current
account balance, would likely be small (Exhibit 20).
Exhibit 19: Government plans to raise tariffs on 370 products

% of total imports % of total imports in
370 products from: contributed by particular particular category coming
category (2019) from China (2019)
Chemicals/fertilizers 10.0% 28.3%
Steel/metal articles 6.6% 16.8%
Electronics 10.6% 39.6%
Heavy/industrial machinery 9.3% 31.5%
Furniture 0.4% 56.1%
Paper 1.2% 9.7%
Rubber articles 0.7% 8.7%
Glass 0.6% 52.8%
Plastic Toys 0.1% 69.4%
Source: Bloomberg Quint, news reports, Trademap

Exhibit 20: Only 3% of overall imports are likely to be impacted by tariff hikes and the ban on imports
Import amount Estimated effect on
Products Trade measure
targeted (USD bn) imports/yr (USD bn)
370 product list 12 Tariff hike- 40%*# 4.8
101 defense items ~50 over 5 years Total Ban 10
Reduction in imports from the tariff hike/ban (USD bn) 14.8
India’s total merchandise imports in FY20 (USD bn) 480
Reduction in imports (as % of total imports FY20) = Effective
3%
tariff rate
Current Account Balance improves by**
0.5
(as % of GDP)
*Tariff hike can range between 10%-40%, we have taken the upper limit for the calculations
#
The effect on imports due to higher tariffs assumes that 1% higher tariffs lead to 1% lower imports.
**Assuming exports remain the same
Source: News reports, TimesofIndia.com, Goldman Sachs Global Investment Research, Ministry of Defense
Overall, whether manufacturing could get a boost from higher tariffs in the medium
term would ultimately depend on at least three key factors:
n Actual implementation of these tariffs.

n Input/output linkages. While higher tariffs on final goods could protect domestic
producers against cheaper imports; those on intermediate inputs could, in fact, hurt
them as their costs of production would increase.
n Synergy with other reforms e.g. land, labour, infrastructure and human capital.
Beyond manufacturing, the growth impact of higher tariffs could work through several
other mechanisms:
n Trade effect (+ve): Leveraging academic evidence, and our work across the region,
suggests that higher tariffs typically get passed through to retailers and households
through higher prices. Higher import prices would lower import volumes, and
increase net trade, and would therefore be a positive for growth. Our estimates
suggest that the decline in imports from higher tariffs announced so far could help
improve the current account balance by 0.5%-0.6% of GDP (Exhibit 20).
Goldman Sachs India
n Real income effect (-ve): Higher tariffs if passed through to consumer prices could
lead to lower real incomes, and lower growth.
n Financial conditions (-ve): Higher tariffs could lead to tighter financial conditions,
and lead to a negative impulse for growth.
n Uncertainty effect (-ve): Higher tariffs could lead to greater uncertainty about
policies, and could dampen investment. In this case, for example, we estimate this
effect to comprise a significant negative drag on growth.
Therefore, while higher tariffs could provide protection and help some industries to
grow, there could be several counteracting effects, especially for consumers, and
therefore the net effect could turn out to be negative from an overall macroeconomic
perspective.
4. Firm relocation and supply chain shifts

Finally, the fourth initiative focuses on incentivizing foreign firms to relocate to India. The
idea is that higher import tariffs, production incentives, and an explicit effort to target
and reach out to particular companies, could influence firms to shift their factories to
India from other countries, mainly from China, especially when US-China trade tensions
are ongoing. Research by our regional team suggests that supply chains indeed have
shifted from China over the last two years, with Vietnam being the most favored
destination for production relocation among China’s 12 major trade partners. Exhibit 21
(right panel) shows that as of Q4 2019, US imports of cellphones and other electronic
devices from Vietnam were significantly higher compared to counterfactuals (estimated
based on the pre US-China trade war shares). Meanwhile, Chinese exports of inputs for
these electronic devices (processors & controllers) to Vietnam also surged, thus
indicating that the final product was being assembled in Vietnam and then exported to
the US.
India, on the other hand, has gained little so far overall, though there is some evidence
of relocation in specific sectors, e.g. mobile phones. India’s imports of mobile phones
from China declined during 2017-19, while imports of integrated circuits rose during the
same period, which may suggest some evidence for relocation of assembly in the
downstream part of electronics supply chain. Even in the mobile phone sector, however,
while Vietnam’s exports to the US rose significantly compared to a pre trade-war
scenario, exports from India increased only marginally (Exhibit 21, left panel). Several
reports suggest that very few firms moving out of China relocated to India, and shifted
to Vietnam instead. This could be explained by the fact that despite favourable
demographics and relative low labour costs, India’s overall manufacturing
competitiveness (which comprises competitiveness in costs, regulations, logistics)
ranks low compared to its Asian counterparts (see Potential implications of US-China
trade tensions for Southeast Asia and India).
Goldman Sachs India
Exhibit 21: US imports from Vietnam surged due to the trade war with China, but India has gained little
1.2 1.2
US imports more US imports more
from India from Vietnam Cellphones
Deviations in US imports from Vietnam

1.0 1.0
Deviations in US imports from India
0.8 0.8 Switching & routing
(USD bn, 2019 Q4)

apparatus
(USD bn, 2019 Q4)
0.6 0.6
0.4 0.4
Paintings & Solar cells
drawings &LED Processors &
0.2 Solar cells Printed
& LED Diamonds Light oils 0.2 controllers
Computer & mobile Telephone circuit
Cellphones assemblies
components parts
0.0 0.0
Laptops Electric machinery China exports Memory chips China exports
Medicine & equipment parts more to India
-0.2 more to Vietnam
-0.2
-0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2 1.4
-0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
Deviations in China exports to India (USD bn, 2019 Q4) Deviations in China exports to Vietnam (USD bn, 2019 Q4)
Source: USITC, Trademap, Goldman Sachs Global Investment Research
The constraints for improving manufacturing competitiveness are, however, not

sacrosanct, and could change under the new initiatives. In fact, India’s government
reached out proactively in May to 1000+ companies in the US and other countries
moving out of China, to attract investment. Several states also announced various land
and labour reforms to incentivize production relocation (e.g. extension of working hours,
changes in land regulations, fast track process to issue licenses etc.). The impact of all
these actions, however, remains to be seen, and would depend on finer details, and
their execution.
To summarize, our overall view is that while at the outset, several of the initiatives under
the “Self-reliant India” program appear small in magnitude from a macroeconomic
perspective, if these could be well executed and lead to positive spillover effects, we
could see some boost to manufacturing and growth. There could, however, be offsetting
negative effects as well e.g. from higher tariffs, as discussed above. We think what the
market would likely want to see in the coming months is a credible program, greater
details, and concrete steps with timelines to have more confidence in the government’s
program. The intent on providing a boost to manufacturing is clear – we think what
markets would be looking for is greater progress on implementation.
Importantly, over view is that the initiatives to make India self-reliant would need to be
combined with an all-out effort to boost manufacturing competitiveness, and as we have
highlighted before, to be complemented with structural reforms in the four key areas: (i)
land, (ii), labour, (iii) export promotion, and (iv) privatization. (See Scenarios Around
Potential Reforms and Implications for Macro, Micro and Markets). There has been
some progress in these areas, especially at the state level. Based on the World Bank’s
Doing Business indicators, India’s overall ranking has improved from 132nd in 2013 to
63rd in 2019. Yet, on our GS manufacturing competitiveness indices that cover several
areas including logistics and infrastructure; and regulations and tax, India still ranks low
compared with not only advanced economies, but several regional and EM peers too.
(see Exhibit 22).
Goldman Sachs India
Exhibit 22: India ranks low on GS manufacturing competitiveness indices

Index Index Index Index
1.0 1.0 1.0 1.0
0.9 Logistics and Infrastructure 0.9 0.9 Regulations and Tax 0.9
Better logistics and infra
0.8 0.8 0.8 Latest 2012/14 0.8
Latest 2012/14
0.7 0.7 0.7 0.7
More business-friendly
0.6 0.6 0.6 0.6
0.5 0.5 0.5 0.5
0.4 0.4 0.4 0.4
0.3 0.3 0.3 0.3
0.2 0.2 0.2 0.2
0.1 0.1 0.1 0.1
0.0 0.0 0.0 0.0
Japan
Cambodia
Russia
Russia
Brazil
Indonesia
Indonesia
Vietnam
Turkey
Japan
Mexico
Poland
Cambodia
India
Turkey
Vietnam
Brazil
India
Mexico
South Africa
Poland
South Africa
China
Thailand
Germany
US
UK
Thailand
China
UK
US
Germany
Philippines
Malaysia
South Korea
Philippines
Malaysia
South Korea
Bangladesh
Bangladesh
Source: World Bank, OECD, Haver Analytics, CEIC, WEF, Goldman Sachs Global Investment Research
Impact on growth
Against this background, we build three scenarios, and consider what might happen to
India’s growth under the different scenarios.
Base case: Under this scenario, we assume pent-up demand, favourable base effects,
and massive policy support in advanced economies driving the global recovery to lift
India’s economy in the medium term. We, however, struggle to see any domestic
fundamental forces to drive India’s growth forward in the medium run in this scenario.
No sharp improvement in manufacturing competitiveness, and no extensive change in
the institutional structure such as land and labour laws, intensified export promotion, or
privatization. GDP growth would settle into a 5-6% range, the new “normal” in this
scenario.
Acceleration: Vast improvements in manufacturing competitiveness, successful

implementation of the production-linked incentive schemes, complemented with
improvements in infrastructure, as well as in labour, and land laws, greater participation
of the private sector, and higher exports. Manufacturing in this scenario would get a
significant boost. The manufacturing sector also becomes a training ground for workers,
absorbing more students with a middle or high school education. India moves into
niches vacated by China. India experiences faster growth. In this scenario, we would
expect real GDP growth to pick up to 8% over the next five years.
Regression: In this case, no improvement takes place in infrastructure, or in institutions,

and there is little take-up of the production linked incentive schemes. As fewer
opportunities are created outside of agriculture, more workers stay in agriculture,
increasing the pressure on land and lowering real incomes. More dole-outs are given to
agriculture and transfers are made to rural areas. This puts pressure on the
government’s fiscal position. Growth under this scenario would fall to 3% over the next
five years.
Goldman Sachs India
Exhibit 23: Economic growth could accelerate to 8% or regress to 3%

depending on government reforms
Percent, yoy Percent, yoy
10 10
Possible range of GDP growth estimates (FY22-26)
8%
8 - No major reforms 8
- Weak infra and institutions
- Low real wages
- More dole outs
6 5%-6% - Fiscal strain 6
4 - Improved 4
manufacturing 3%
competitiveness
- Land reforms
2 - Labor reforms 2
- Privatization
- Export promotion
0 0
Acceleration Base case Regression

Overall, moving from base case to acceleration appears to be a daunting

task
The government aims to increase manufacturing to 25% of GDP by 2025, from 16% of
GDP based on the current official estimates. Our calculations suggest that
manufacturing would need to grow at an annual average of 12.4% during FY22-26,
almost twice the average rate of 5.9% in our base case, to reach even 20% of GDP by
FY26. The schemes under the “Self-reliant India” program, if properly implemented,
could add at most ~1% to India’s medium-term growth (Exhibit 24), on our estimates. If
the incentives announced so far are extended to other manufacturing categories
including apparel, wearables and auto; and if India’s government and corporate sector
indeed go on an all-out effort to raise manufacturing competitiveness and implement
structural reforms, and succeed in getting manufacturing to grow at ~12% on average
over the next five years, in that case, assuming the other sectors grow at their historical
average, this could potentially propel India’s GDP growth from our base case to the
acceleration scenario (Exhibit 25). That said, it seems a daunting task, especially given
the historical performance of the schemes launched in previous years by successive
governments to promote manufacturing.
Exhibit 24: The already announced schemes could add ~1% to the GDP growth if implemented properly
Incremental
Amount Incentive/yr Incentive Rate*
Measure Sector Goals Timeline sales/yr (INR % of GDP
(INR bn) (INR bn) (%)
bn) **
1 2 3 (=1/2) 4 5(=3/4)
6 years: FY23
Critical Bulk Drugs 69 12 15 77
- FY28
Pharmaceuticals
PLI 5 years: FY22
Medical Devices 34 7 5 ~0.8%137
scheme - FY26
Large Scale
5 Years:
Electronics Electronics 410 82 5 1638
FY21 - FY25
manufacturing
Imports Defense equipment
Defense 4000 Dec 2020-25 800 ~0.2%
Embargo manufacturing
* Incentive rate is the % of total sales which will be transferred to the firm as lumpsum amount. E.g. If a pharmaceutical firm makes 77 bn incremental
sales, then 15% of the sales i.e. 12 bn amount will be transferred to the firm as incentive.
** We begin with incentive amount announced by the government and back out the maximum incremental sales it could lead to, ceteris paribus .
Source: Ministry of Defense, Timesofindia.com, Goldman Sachs Global Investment Research
Goldman Sachs India
Exhibit 25: Manufacturing needs to grow at almost double the current

rate to propel GDP growth to 8%, which appears daunting
Percent Percent
30 30
Manufacturing as % of GVA by FY26
25 Average GVA growth FY22-26, (%yoy) 25
Average Manufacturing growth FY22-26 (%yoy)
20 20
15 15
10 10
5 5
0 0
Base case Acceleration Government’s target
Source: Haver Analytics, Goldman Sachs Global Investment Research
Ultimately, whether India shines or loses steam will depend not only on a successful
implementation of key incentives under the “Self-reliant India” program, but more
importantly, on an all-out effort to boost manufacturing competitiveness including costs,
regulation, logistics, along with structural reforms in the four key areas of land, labour,
export promotion, and privatization.
Exhibit 26: India forecast table
FY19^ FY20 FY21 FY22

Actual Actual GS GS
Real GDP (YoY%) 6.1 4.2 -14.8 15.7
CPI (YoY%) 3.4 4.8 6.2 5.7
RBI Policy Repo Rate* 6.25 4.4 3.65 3.65
USD/INR* 69.2 75.4 72.0 71.0
* End of Period
^FY19 refers to April 2018 to March 2019
21 September 2020
Goldman Sachs
27
India
Goldman Sachs India
Industrial: Air conditioners and defence equipment to lead localisation
Pulkit Patni This section has been authored by our India Industrials and Utilities team
+91 22 6616-9044
pulkit.patni@gs.com India AC market: 7% of global market in five years, from 4% now

Goldman Sachs India SPL
While air conditioner sales in any year in India are driven in large part by weather
conditions during summer, we expect growth in room air conditioners (RACs) will be a
secular trend that will continue over the next few years, given the increasing
affordability, improving lifestyles and rising temperature levels. We expect India’s AC
penetration to increase to 21% by FY25 from 10% in FY16 (keeping overall population
matrix as the base), on the back of: 1) increases in per-capita income over time; 2)
improved availability of electricity; 3) gradual recovery in real estate; and 4) rising
temperatures. This, from an affordability matrix penetration, implies 72%
penetration in FY25, vs 49% in FY16. As people spend more time at home during
COVID-19, we believe that AC is now viewed as more of a necessity.
Overall, we expect room AC volume to post a 13% CAGR over FY20-25E. The key
drivers for room AC sales growth over the coming years are:
n Increases in per-capita income over time: India’s current per-capita income equals
China’s per-capita income in 2007. We expect India’s per-capita income to increase at
a CAGR of 7% (on the basis of average GDP growth of 6-7% and population growth
of 1% - based on GSe), vs China’s last decade CAGR of 9.5%, and expect India to
reach China’s current per-capita income in the next 10-12 years.
n Improved availability of electricity: India’s electricity penetration has increased
from 65% in 2010 to c.99% in 2019 through the launch of schemes such as
DDUGJY (Deen Dayal Upadhyaya Gram Jyoti Yojana) & Saubhagya. We expect the
expansion of the power grid coupled with a better power supply to further support
AC penetration in the country.
n Gradual recovery in real estate: India’s real estate market has softened over the
past few years with a sharp decrease in the number of new launches due to
multiple reforms like the Real Estate Regulatory Act (RERA) and demonetization.
However, with unsold inventory declining (peaked in CY Q4 2016) we see a pick-up
in real estate activity over the medium term as the supply overhang declines.
n Rising temperatures: India has seen a sharp rise in temperatures over the past
decade. The Indian Meteorological Department forecasts warmer-than-normal
temperatures with Northwest and Central India likely to be above normal by more
than 1 degree Celsius in the next few years. The National Academy of Sciences in
the US estimates India to have one the highest potential for ACs based on its higher
annual CDDs — a cooling degree day (CDD) is a measurement designed to quantify
the demand for energy needed to cool a building. It is the number of degrees that a
day’s average temperature is above 18 degrees Celsius.
The above points as well COVID-related restrictions are driving people to spend more
time at home, suggesting AC sales in India will likely be strong over the coming years.
Goldman Sachs India
The intensity and duration of summer are also key drivers for AC volume sales.
Exhibit 27: Indian HVAC market in global context

India AC Market
Room Air Conditioner Packaged Air Conditioner
FY19 FY19
Market Size (US$ bn) 1.71 Market Size (US$ bn) 2.29
Market Size (in 000 Units) 5466 Market Size (in 000 Units) 284
Split/Window AC 87%/13% PAC/VRF 86%/14%
FY25 FY25
Market Size (US$ bn) 4.41 Market Size (US$ bn) 4.37
Market Size (in 000 Units) 11104 Market Size (in 000 Units) 429
Split/Window AC 90%/10% PAC/VRF 82%/18%
India as % of World AC market (in units) 7% India as % of World AC market (in units) 6%
India as % of China AC market (in units) 14% India as % of China AC market (in units) 17%
Source: Japan Refrigeration and Air Conditioning Industry Association (JRAIA), Goldman Sachs Global Investment Research
Exhibit 28: Growth in the Indian AC market has been at its strongest Exhibit 29: White goods penetration in China has seen sharp
over the last five years, however penetration still remains quite growth in the past decade while India has lagged far behind
low
Room AC Demand 100% 93%

91% 90%
90%
140
80%
120 World 67%
70%
100
2018, mn units
60% 53%
80 50%
China 43%
40% 33%
60
30%
40
20% 13%
Others North America Asia ex China and Japan 10%
20 India 10%
Latin America Japan
0 0%
Europe China China India China China India China China India
-5% 0% 5% 10% 15%
2006 2016 2016 2006 2016 2016 2006 2016 2016
2013-18 CAGR
Acs Fridge Washing Machine
Source: Japan Refrigeration and Air Conditioning Industry Association (JRAIA) Source: NBS China, World Bank, Goldman Sachs Global Investment Research
Based on our latest room AC industry model (link), which we first published on July 12,
2016 (see report: AC market poised to grow though affordability remains low; Buy), we
estimate India’s annual demand for room AC will increase from 3.9mn units in 2015 to
close to 6mn units currently and to 11.1 mn units in 2025. India’s room AC market
(volumes) has grown at 14%/13% CAGRs in the past 15/5 years, and we expect it to
accelerate to 62.53mn units by 2025 due to the relatively low penetration in the
addressable market, improving power supply and as AC moves from being seen as a
luxury to being seen as a necessity. We estimate penetration will reach 72% in 2025E
(addressable market) with a volume CAGR of +13% during FY20-25.
Exhibit 30: We see India’s installed AC base increasing to 62.5mn units by FY 2025, driven by consumption demand
FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E FY24E FY25E
Installed base at year beginning 22.05 24.13 26.48 29.29 32.41 35.29 39.52 42.14 45.83 50.38 55.89
Consumption during the year 3.85 4.28 4.92 5.47 5.47 7.06 5.79 7.06 8.21 9.55 11.10
Replacement during the year 1.76 1.93 2.12 2.34 2.59 2.82 3.16 3.37 3.67 4.03 4.47
Installed base at year end 24.13 26.48 29.29 32.41 35.29 39.52 42.14 45.83 50.38 55.89 62.53
New demand (Consumption - Replacement) 2.08 2.35 2.81 3.12 2.87 4.23 2.62 3.69 4.54 5.52 6.63
Replacement as % of total 46% 45% 43% 43% 47% 40% 55% 48% 45% 42% 40%
New demand as % of total 54% 55% 57% 57% 53% 60% 45% 52% 55% 58% 60%
Goldman Sachs India
Exhibit 31: We forecast the installed base as well as penetration to increase to 21% and 72% respectively
by FY2025
Installed capacity and penetration FY15 FY22E FY25E
Population of India (mn) 1311 1425 1477
Total number of households (mn, assuming size of household as 5) 262 285 295
Number of households that can afford an AC (mn, based on relevant income levels) 54 75 87
Installed base of Room ACs (mn units) 26.5 45.8 62.5
Overall penetration (Installed base / Total number of HHs) 10.1% 16.1% 21.2%
Addressable penetration (Installed base / HHs that can afford an AC) 49% 61% 72%
Assumptions:
AC volume growth at 13% FY19-25E
Replacement demand 8% of installed capacity
Exhibit 32: We estimate India’s share of global market to increase

from 4% in FY18 to 7% by FY25E
100% 3% 3% 4% 4% 4% 3% 2% 2% 2%
3% 3% 3% 3% 3% 4% 4% 4% 7%
90% 7% 6% 5% 4% 4% 5% 5% 5%
6% 5% 5% 4%
6% 6% 6% 6% 5% 5%
80% 7% 7% 7% 6% 6%
6% 7% 7% 6%
70% 11% 12% 12%
10% 11% 11% 12% 13% 14%
8% 7% 7% 7%
60% 8% 8% 7% 7% 7%
50%
40%
30% 57% 55% 58% 56% 56% 59% 60%
55% 55%
20%
10%
0%
2011 2012 2013 2014 2015 2016 2017 2018 2025E
China Japan Asia ex China and Japan
North America Latin America Europe
India Others
Source: Goldman Sachs Global Investment Research, JRAIA(The Japan Referigeration and Air
Conditioning Industry Association)
Localization in India’s AC manufacturing has been on the rise over the past couple of
years, driven by higher import duty imposed by the government as well as a greater
focus by companies to reduce their dependency on China. Currently only about 10%
of ACs are being imported as CBUs (completely built units), vs 30% two years ago.
As a result, over the past couple of years, companies have shifted from importing
completely built units, to more imports of components and indoor units of split air
conditioners.
We see scope for further localization, driven by increased government focus to further
enhance domestic AC manufacturing as part of its Make in India scheme and companies
facing supply chain disruptions prior to the peak summer season this year due to
COVID-19.
Four critical components i.e Compressors, Condensers, Blower motors and PCB
circuits (for Inverter ACs), which together account for ~55% of the cost of air
conditioners, will likely continue to be imported in the near term. We believe a
fragmented market like India with a total size of only ~6mn units pa (the largest player
Voltas has ~24% market share of the MBO (Multi Brand Outlet) market) does not have
enough scale for each player to set up manufacturing units for each of these individual
components and backward integrate operations. We believe that either specialist
ODM/OEM manufacturers or global companies could set up manufacturing units for
these components in case the import cost becomes a hurdle due to higher duties or
there are favourable initiatives by the government to help set up large units to cater to
Goldman Sachs India
multiple geographies as part of their China +1 strategy. As a result, we see Make in

India gradually increasing the localization of AC components and shifting more segments
of the supply chain to set up units in India. Additionally, companies like Voltas, with large
domestic market share, could be potential partners for such global companies to enter
India. Also, Voltas could have favourable purchase terms from these OEM/ODMs given
the scale of committed business it can offer.
Export of ACs from India: India represents less than 0.4% of global AC exports (valuing
at Rs12-13bn) with China leading the pack with about 34% share in exports. India’s
share implies exports of about 0.6-0.7mn units pa, which implies high single digit % of
domestic consumption. While we don’t expect a major change in this, as and when
Make in India kicks off with more government support, we believe India’s share could
rise. We expect India could be used for China +1 strategies where foreign companies
could use India as an export base (diversifying away from China) in addition to their
factories globally. This would also support the India players by giving them economies of
scale. A doubling of exports over 3-4 years (from 0.4% to 1% market share) could mean
an additional 15pp growth for the Indian companies – which we think is quite realistic if
the cost structures are aligned, driven by government policy support.
Exhibit 33: India imports most of the critical parts and the process of assembly is undertaken by most companies in-house
Indoor Units
are increasing
Currently nearly 100% of
assembled
compressors are imported locally
from China
Source: US Department of Energy
Goldman Sachs India
Exhibit 34: Imports for Compressors, Blower Motors, Condenser

Motors and PCB Circuits contribute to 55% of the total cost of
manufacturing
Cost of Manufacturing 1.5 ton AC
Component 2019 % By Value
Compressor 4454 24%

Blower Motor 1899 10%
Condensor Motor CFM 1957 10%
PCB Circuit 2000 11%
R. Capacitor 353 1.9%
S. Capacitor 268 1.4%
Relay 272 1.5%
Capillary & Filter 241 1.3%
Thermostat Switch 483 2.6%
Sensors for All Models Acs 519 2.8%
Air Filter SAC (Calculated Per Ton) 778 4.2%
Lower Motor- WAC &SAC 630 3.4%
Gas Charging- SAC 1,1.5,2 Ton 1377 7.4%
(Calculated Per Ton) 121 0.6%
Outdoor for SAC 3293 17.7%
Cost Price of All Components* 18645 100%

% Cost of Parts Imported 55.3%
Source: Indian Institute of Technology
Exhibit 35: Indian domestic AC manufacturing units currently act as assembly centers and India has a total capacity of ~9.7 mn units
Data as of Dec 2019
ACs sold Number of
Capacity (mn) Parts Manufactured
(volume mn) Plants
1 Voltas 1.22 1.0 4 Imports 0.7, assembles 0.7- AC,AC equipment and parts
2 LG 0.81 1.2 2 IDU, assembles from Amber, Dixon, Edurables, imports compressors and PCB
3 Blue Star 0.63 1.0 5 IDU,ODU,fin and heat exchangers, assembly
4 Hitachi 0.61 0.4 1 RACs
5 Daikin India 0.56 1.5 3 RAC, casette AC, VRV, ductable units
6 Samsung 0.25 0.0 1 No manufacturing, importing through FTA from Vietnam
7 Whirlpool 0.20 0.0 0 Imports IDU from China, assembles
8 LEEL 0.56 0.6 1 Heat exchangers, assembly and OEM for 1,3,4 tons
9 Amber 2.12 1.4 15 IDU,ODU,WAC for 1-5,7,10 (proportion of units not provided)
10 Haier 0.35 0.5 1 RACs
11 Carrier Midea 0.9 1 RACs
12 Godrej 0.20 0.3 1 RACs
13 Havells 1.0 1 Moulding, heat exchanger, copper tubing and assembly
Total 7.52 9.7
5.06
Some of the data is double counted as the capacity is based on assembly operation for different processes based on job work
Source: Company data, Goldman Sachs Global Investment Research
Goldman Sachs India
Exhibit 36: In terms of domestic manufacturing, ODMs are the Exhibit 37: ...with imports of completely built-in units accounting
primary driver of increased localization... for ~10% of the market
OEM/ODM Share RAC Brands OEM/ODM Share Imports

40% 38% 100%
10%
34% 90% 20%
35%
80%
30%
70% 43%
25% 38%
60%
20% 50%
16%
15% 40%
30%
10% 47%
20% 42%
5% 10%
0% 0%
2015 2019 2020 FY19 FY20
Source: Frost and Sullivan Source: Frost and Sullivan, Goldman Sachs Global Investment Research
Exhibit 38: Indian air conditioner imports primarily come from Exhibit 39: Chinese companies now account for 50%-70% global
China and Southeast Asia production share

Data as of Dec 2019 Global share in 2015 (%)
1% China Brand Share China Production Share
80%
72.5%
70%
60% 57.5% 56.2%

48.8%
42% China 50%
SE Asia 40%
31.7%
Others
30% 23.9%
58%
20%
10%
0%
Laundry Refrigeration Air conditioner
Source: Frost and Sullivan Source: Euromonitor
Electronic manufacturing is one of the 25 key sectors within which there is a focus to
enhance domestic manufacturing capability of: 1) Consumer Electronics, 2) White
goods, and 3) Electronic hardware. With this in mind the government has announced
measures such as:
1) 100% FDI through automatic route in electronics hardware manufacturing: In

order to incentivize domestic electronic manufacturing, the government has recently
allowed 100% FDI in manufacturing of Electronic systems and hardware, with the
exception of restrictions on defense electronics and medical electronics;
2) Increasing custom duty on Air Conditioners from 10% to 20%: In the July 2019
budget the Government of India increased the custom duty on Air Conditioners
irrespective of how they are imported, ie, as one complete unit or separate indoor and
outdoor units. This would imply that companies which import ACs would now have to
offset this duty hike by increasing prices by 8-9%, thus incentivizing them to increase
local manufacturing. There have been news reports (link) of further potential hikes in
duties in order to support what is called a Phased Manufacturing Programme (PMP).
Under this, the Government could increase differential import duty on various
Goldman Sachs India
components in a phased manner with the objective to promote local manufacturing.
3) Modified Special Incentive Package Scheme (M-SIPS) and Production Linked

Incentive: M-SIPS scheme will be operational from July 2020. It offers 25% subsidy on
capital expenses to manufacturers. The scheme also reimburses manufacturers excise
duty and additional duty paid on imported capital equipment. Further, all central taxes
and duties are reimbursed for 29 industry verticals for high capital projects. The
Government also came up with a Production Linked Incentive scheme (PLI) for telecom
equipment. Something similar is expected (proposed by the Department of Promotion
of Industry and Internal Trade (DPIIT) (link) to be rolled out for Air Conditioner
manufacturing as well but clarity on this is awaited. Under this scheme, based on both
initial and cumulative investment, the companies qualify for an incentive of 6% for the
first two years, followed by 5% for the next two years and 4% for the fifth year.
If we take the PLI scheme for telecom equipment as a benchmark, then it is clear that
there is a high threshold of incremental sales that a company needs to achieve to
benefit from the scheme. That is one of the reasons why we believe that companies
with high market share (like Voltas) are likely to benefit much more. Taking the example
of mobile phone makers, an investment of Rs2bn over a five-year period can drive up to
Rs0.8bn in incentives alone - implying 40% of investment returned back, which could
allow companies to pass on 25% discounts on prices to consumers. However, this
requires high level of incremental sales. Hence, we believe Voltas may be best-placed
among peers to benefit from this initiative.
4) Lower tax rate for manufacturing companies: In order to make Indian companies
more competitive the Government of India last September cut the domestic corporate
tax rate to 22% from 30%. In addition to this, manufacturing companies set up after 1st
October 2019 would get an option to pay a 15% tax rate. With this the Indian corporate
tax rate has become one of the lowest in the world.
Exhibit 40: Production Linked Incentive scheme (PLI) for telecom equipment. Something similar could be
rolled out for air conditioner manufacturing as well but we are awaiting clarity on this
Illustration showing financials under PLI
Particulars (Rs bn) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Investment - 5 5 5 5 -
Cumulative Investment - 5 10 15 20 20
Sales - 5 15 30 50 75
Incentive - 0 1 2 3 3
Cumulative Incentive - 0 1 3 5 8
Incentive as % of Investment 41%
PBT Margin 5% 5% 5% 5% 5%
PAT 0.19 0.75 1.50 2.50 3.75
RoI (%) 4% 9% 12% 17% 32%
Source: Ministry of Electronics and IT (MietY)
We think total cost of manufacturing ACs in India currently is at least 25% higher than in
China due to differences in scale of operations. On the raw materials front, critical
components accounting for 50-55% of value are imported, though we expect the higher
cost of these raw materials to be partially offset by lower labour costs in India. On an
overall basis we expect Indian factory manufacturing costs to be 4% higher than in
Goldman Sachs India
China. However, the biggest difference is due to the impact of negative operating
leverage given the current Indian AC market is only ~10% the size of China’s. Further,
India’s logistics costs are significantly higher than those in the US and China
(manufacturing as a % of GDP is 17% for India, vs 45% in China and 28% for the US)
with higher logistics costs driven by higher inventory holding costs and no major SEZ or
tax holidays currently provided. As a result on an overall basis we think total cost of
manufacturing ACs in India currently is at least 25% higher than in China.
Exhibit 41: We think total manufacturing cost for ACs in India currently is at least 25% higher than in China due to difference in scale of
operations
GSe on cost differential between China and India for ACs
Cost of Manufacturing AC in China Cost of Manufacturing AC in India

Components Compressor 21% Components Compressor 24%
Copper 11% Copper 11%
Others 11% Others 11%
Steel 10% Steel 11%
Fan Motors 8% Fan Motors 8%

Aluminum 5% Aluminum 5%
Paints 1% Paints 1%
Labor Labor Expense 8% Labor Labor Expense 5%
Other Other Expense 8% Other Other Expense 12%
Total COGS 84% Total COGS 88%
SGA Selling Expense 10% SGA Selling Expense 20%
Admin Expense 4% Admin Expense 6%
Others Finance Expense 1% Others Finance Expense 6%
Others 1% Others 5%
Total 100% Total 125%
Key assumptions
Import duty on Compressor 13%
Cost differential in Copper 0%
Cost differential in Steel 10%
Cost differential in Aluminum 0%
Freight differential 5%
Source: Goldman Sachs Global Investment Research, Federation of Indian Chambers of Commerce & Industry
Goldman Sachs India
Exhibit 42: Production Linked Incentive schemes (PLI) similar to what has been rolled out for telecom equipment could help in achieving
cost parity for AC manufacturers
Data as of May 2020
New duty
New duty structure Make in India
Current structure (CBU (component Make in India (scenario used -
Component situation import) import) (today) with PLI)
Compressor 4,454 5,146 5,567 4,231

Blower Motor 1,899 2,072 2,374 1,805
Condenser Motor CFM 1,957 2,135 2,446 1,859
PCB Circuit 2,000 2,182 2,500 1,900
R. Capacitor 353 353 353 353
S. Capacitor 268 268 268 268
Relay 272 272 272 272
Capillary & Filter 241 241 241 241
Thermostat Switch 483 483 483 483
Sensors for All Models Acs 519 519 519 519
Air Filter SAC (Calculated Per Ton) 778 778 778 778
Lower Motor- WAC &SAC 630 630 630 630
Gas Charging- SAC 1,1.5,2 Ton 1,377 1,377 1,377 1,377
N2 Flushing, Leakage Testing & Vaccummissing (Calculated Per Ton) 121 121 121 121
Copper Piping, Insulation, Wiring Indoor & Outdoor for SAC 3,293 3,293 3,293 3,293
Cost Price of All Components 18,645 20,199 19,870 21,223 18,129

Company margin/tax/logistics/dealer+ retailer margins 12,492 13,533 13,313 14,219 12,147
Sales price 31,137 33,732 33,183 35,442 30,276
% change vs. current situation 8.3% 6.6% 13.8% -2.8%
Covered companies: Key beneficiaries from MII theme and associated

government schemes
Voltas (Buy, on CL): We expect Make in India to integrate global manufacturing
capability with local assembly. Backward integration over time should prove to be more
advantageous for OEMs/ODMs and players like Voltas with large market share given
economies of scale (one-quarter of India’s market, as of FY2020) and strong
distribution networks. In our view, Voltas will grow faster than peers and achieve critical
mass first among peers, which is needed to benefit from “MII” and the shift to
domestic manufacturing. With strong support from its parent company (Tata Group), we
expect Voltas to successfully collabourate with global players similar to what was seen
in the Voltas-Beko JV. Our FY20-25 earnings grow at a 16% CAGR for Voltas (vs 6% over
the past five years).
Goldman Sachs India
Exhibit 43: Voltas has leveraged its strengths to continuously gain Exhibit 44: Voltas also has the strongest and deepest distribution
market share and retain its market leadership position network vs. peers - with a dominant position in North India
Note: For Daikin and Blue Star it is number of Channel Partners
26% Touch points

24.2%
23.7% 16000
24% 15000
22.1%
21.4% 14000
22% 20.9%
19.8% 12000
20%
18.4% 10000
10000
18% 17.1% 8000 8000
16.7%
8000
16%
6000 5300
14% 3800
4000
12%
2000
10% 0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Voltas Lloyd Electric Hitachi Samsung Daikin Blue Star
Source: Company data as of Dec 2019

Exhibit 45: We expect Voltas UCP revenue to grow -22%/28%/15% in

FY21E-23E
UCP-UCP stands for the Unitary Cooling Products segment of the company
Voltas UCP Rev
70000
61857
60000
53788
50000 46773
Revenue in Rs mn
40737 40672
40000
30469 32261 31556 31775
30000 25105 25210
20524
18356
20000
10000
0
2013
2015
2016
2017
2018
2019
2020
2021E
2022E
2023E
2025E
2014
2024E
Valuation: We expect Voltas – the leader in India’s air conditioner (AC) market – to
continue leveraging its strong product portfolio and extensive distribution reach over the
medium term. In the process, we expect Voltas to be a major beneficiary of demand
growth in India’s AC market and – coupled with its exposure to the robust mechanical,
electrical and plumbing (MEP) segment – to drive a strong earnings CAGR of 16% in
FY20-25E. In our recent report on India’s air-conditioner market, we highlighted how
production-linked incentive schemes, and other policy reforms could help Indian
companies source more domestically, and how Voltas (Buy, on CL) is well-positioned as
a company with the scale that could do incremental backward integration. Our
unchanged 12-month SOTP-based target price of Rs680 is derived by valuing the
business on FY25E earnings and discounting back three years to FY22E.
Key risks: Increased pricing competition, margin pressures from commodity price
inflation, and supply-chain disruptions from an immediate ban on imports.
Havells (Neutral): Havells acquired the Lloyds Brand from LEEL (Lloyd Electrical and
Engineering Limited) in May 2017. The Lloyds brand currently has a market share of
Goldman Sachs India
~11% in the Indian AC market. Initially, the majority of Lloyds products were imported
from China. However, recently Havells inaugurated a new AC plant in Ghiloth,
Rajasthan, with an annual capacity of 1mn ACs. In this production facility, Havells will
be manufacturing the moulds, copper tubing (heat exchangers) and assembly of the Air
Conditioners. The plant is highly automated. With this the company plans to increase the
locally sourced components in its ACs and reduce its dependency on global imports.
However, as stated by the company, it plans to continue the imports of the key
components.
We have incorporated the benefits of domestic manufacturing in its outer year margins
for Havells achieved through more domestic integration. (This is only for the current
commissioned plant). We remain Neutral on Havells (unchanged 12-month TP of Rs560),
the other AC company in our coverage, given the limited upside potential driven by its
relatively smaller AC business (17% of FY20 revenues) and what looks a premium
valuation (52X FY22E P/E).
Valuation: We are Neutral on Havells. We value the company on 38x (unchanged) P/E
multiple to FY25E to capture longer-term growth, and discount it back three years to
derive our 12-month price target of Rs560.
Key risks: Upside: 1) higher government incentives for the housing sector, and 2)
faster-than-expected pick-up in the home building segment in India. Downside: 1) failure
to scale up meaningfully, 2) high competition resulting in lower profitability and 3)
longer-than-expected lockdowns related to Covid-19.
Not Covered companies with potential exposure to the MII theme and
associated government schemes
As part of our overall industry analysis we also look at a number of Not Covered
companies in the segment with potential exposure to the MII theme.
Amber Enterprises India Ltd: Amber Enterprises India Ltd is the leading solutions
provider for the air conditioner OEM/ODM industry in India. It has a dominant presence
in complete units of RACs and also deals in major RAC components, with 10
manufacturing facilities across India. The company’s offering includes ACs –indoor,
outdoor, split/inverter and window AC units – and AC components like heat exchangers,
sheet metal components, injection molding components, and system tubing and
motors. The company also deals in non-AC components.
Dixon Technologies (India) Limited: Dixon Technologies (India) Limited is one the
largest players in the electronic manufacturing services (EMS) space in India. The
company is a leading provider of OEM/ODM solutions for: 1) consumer electronics, 2)
home appliances, 3) lighting, 4) mobile phones, 5) security systems, and 6) medical
electronics. The company sees itself as well-placed under the PLI scheme for mobile
manufacturing (link), with further such schemes as those proposed by the Department
of Promotion of Industry and Internal Trade (DPIIT) (link) across various consumer
electronic product categories.
Blue Star Ltd: Blue Star is a pure play cooling company in India having presence in
Goldman Sachs India
room AC, MEP (mechanical, electrical and plumbing) projects, packaged air conditioners,
chillers, cold rooms as well as refrigeration products and systems. The company had
~11-12% market share(at the end of FY20 based on company in the room AC segment
and has four manufacturing facilities in India. Its scale could be compared to Voltas.
Johnson Controls-Hitachi Air Conditioning India Limited: Johnson Controls-Hitachi

Air Conditioning India Limited is a joint venture between Johnson Controls (from the US)
and Hitachi Appliances (Japan), which manufactures a wide range of products, from
room air-conditioners (split & window ACs) to commercial air-conditioners including VRF
systems, ductable air-conditioners, chillers and telecom air-conditioners, under the brand
“Hitachi Cooling & Heating”. The company also deals with the trading of refrigerators and
air purifiers. The company has a manufacturing facility in Ahmadabad India with annual
capacity for 0.9mn units of room ACs. The company also has annual capacity to
manufacture 1,200,000 tons of ductable units, 9,000 VRFs ODUs and 300 chiller units.
Whirlpool of India Ltd: Whirlpool of India is a subsidiary of Whirlpool Corporation, and

has a presence across all major categories of home appliances like refrigerators,
washing machines and air conditioners. We note its manufacturing presence in India
(three factories) and strong parentage, though similar to Havells, air conditioners only
form a small part of its overall revenue.
Defence offers significant opportunity, but there have been false starts in
the past
With one of the largest armed forces in terms of headcount in the world, India imports
60-70% of its arms each year from various countries – it is one of the world’s largest
arms importers. About 40% of the defence budget (annual allocation of US$D35-40bn)
is spent on capital acquisitions, with US$100-150bn to be spent on defence
modernization programmes by 2025 based on the current run-rate. The government is
the sole purchaser of defence equipment. Allowed FDI ownership in defence-related
companies was increased to 49% from 26% (in May 2014) and was recently (on 16th
May 2020 (link)) increased to 74% – which we think is positive for technology sharing in
the sector.
Goldman Sachs India
Exhibit 46: India’s total defence expenditure reached ~Rs4,300bn in Exhibit 47: Army accounts for more than 50% of expenditure,
FY20 followed by Air Force (21%), and Navy (16%)
As of FY20
5000
4500
5%
4000 5%
3500
3000
21%
2500
52%
2000
1500
1000
16%
500
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Total defence expenditure (INR bn) Capital outlay Army Navy Air Force Others DRDO
Source: Ministry of Defence Source: Ministry of Defence

Exhibit 48: Only ~40% (in value) of defence contracts were given to
Indian vendors over the past five years, but this has been changing
1000
900
800
700
600
500
400
300
200
100
0
2016 2017 2018 2019 2020 (10 month)
Value of contracts to India vendors (INR bn) Total contracts
Source: Ministry of Defence
Key challenges for the domestic private sector: 1) The biggest hindrance in the
private sector’s participation so far has been its lack of technology, specially for high-end
equipment. 2) Single source procurement from the private sector is still not considered
ideal in defence, given sensitivity around the nature of the business. 3) Defence
Research and Development Organization (DRDO), the agency under the Ministry of
Defence in charge of military research and development, and domestic industry are not
engaged in the initial planning processes, in our view. 4) Defence orders tend to take a
long time, and can often see long delays. 5) Companies with prior experience in
supplying defence equipment, particularly PSUs (Public Sector Undertakings) tend to do
better in tenders than private sector players. 6) The defence industry requires a highly
skilled labour force. 7) Strong R&D skills are required.
The government has started to focus on localisation: The increase in FDI percentage
recently is a step towards higher localisation. This will also facilitate the development
and production of high-end technology systems within the country. A wide range of
technologies and systems – like missile technology, remote weapon systems and
advanced armor solutions which are currently imported – could be localised as
partnerships between international and local companies proceed, in our view. We would
Goldman Sachs India
see large opportunities for SMEs, which can operate as subcontractors to many of the
PSUs as well as private sector players undertaking these defence procurement
contracts. As the government of India has now allowed 74% FDI in the sector recently,
various foreign players may now set up their businesses with the help of Indian
companies – as the foreign firms can have higher control of their patented technology
once they own a majority stake.
Defence sector reforms:
1. Revision of FDI limit: The FDI limit in defence manufacturing under the automatic
route (i.e. does not require prior approval from the Government of India or the
Reserve Bank of India) was raised from 49% to 74%.
2. Set-up of the Project Management Unit (PMU) (for contract management
purposes): This should aid time-bound defence procurement and faster
decision-making.
3. Reduction in Defence Import Bill: According to a government notice in early
August 2020, a list of weapons/platforms was banned for import with immediate
effect and such items can only be purchased from the domestic market. A list of 101
items had already been declared, which included some high-tech weapon systems
like artillery guns, assault rifles, corvettes, sonar systems, transport aircraft, light
combat helicopters (LCHs), radars and other items.
4. Separate budget provision for domestic capital procurement.
5. Corporatisation of the Ordinance Factory Board (government companies that are
structured as boards and not as corporates, which results in less accountability and
weaker reporting) will drive higher reporting standards: It will include public
disclosure of some units, ensuring a more efficient interface of the manufacturer
with the designer and end-user.
government schemes
Larsen & Toubro (Buy): L&T is one of India’s largest domestic private sector defence
companies. With the government of India’s renewed push towards domestic defence
procurement and a list of 101 products (link) being banned from imports, the prospects
for the defence business again seem to be picking up for L&T. Management in our
recent meeting (link) indicated that the company can manufacture close to 50% of the
products from that list, however management added that historically defense orders
have tended to progress slowly, hence they believe prospects could take time to
materialize into orders. Near term, we believe the submarine order for which L&T is one
of the two shortlisted prospects could be a big potential order win (link), and remains a
key development to watch out for. L&T also recently received an order from the Ministry
of Defence for supply of the ‘four regiments of the Pinaka Weapons system’. However,
defence still forms a small percentage of L&T’s orders and revenue. As of 31st March
2020, defence was less than 5% of L&T’s orderbook and about a similar % of revenue.
BHEL (Sell): BHEL is majority owned by GOI (63% share) and has three main business
Goldman Sachs India
verticals: Power, Industrial and International operations. Within the Industrial business,
Defence and Aerospace form a key part of BHEL’s offering. The company supplies heat
exchangers, cryogenic tanks, titanium shells / domes customized for defense
applications. Over time BHEL has also developed the capability to manufacture defence
systems through partnerships and technology transfers from OEMs. Recently (7th Feb
2020 (link)), the company has signed an MOU with Bharat Electronics Limited to jointly
develop and market products and systems for defence applications.
Not Covered companies with potential exposure to the MII theme and associated
government schemes
As part of our overall industry analysis we also look at a numebr of Not Covered
BEML: BEML is majority owned by GOI (54% share) and has three main business
verticals: Defense, Mining & Construction, Rail & Road. Within Defense, BEML
primarily supplies various types of vehicles including trucks, trailers, wagons, trolleys.
Recently, BEML said it has won an order of Rs8.4bn to supply 330 High Mobility
Vehicles over the next three years, from the Ministry of Defense.
Bharat Electronics Limited: BEL is a GOI-owned company and caters to the

specialized electronic equipment requirements of the Indian Defence Services. BEL
produces a wide range of equipment across Defence Communication, Radars, Naval
Systems, Weapon Systems, Homeland Security, Telecom & Broadcast Systems, Tank
Electronics, amongst other products, including some items in the list of 101 items
under the Import ban, including Communication systems, Radars, and Monitoring
Systems.
Hindustan Aeronautics Limited: HAL is primarily involved in the design, manufacturing

and assembly of aircrafts, jet engines, and helicopters, and is under the management of
the Ministry of Defense. HAL’s annual turnover is around US$2bn, and 40% of its
revenues come from international deals with countries like Russia, Israel and some in
Southeast Asia. Management recently highlighted that they will be able to double their
order book in FY21 to reach INR 1tr, and 7 out of the 101 platforms under the import
ban are manufactured by HAL.
Bharat Dynamics Limited: BDL is primarily involved in the manufacturing of

ammunition and missile systems and is a GOI company, under the management of the
Ministry of Defence. Numerous ammunition and missile system related products that it
makes are part of the list of banned import items. In a recent press release, the
company highlighted that is has started manufacturing some components for
anti-tank missiles and underwater weapons which were previously imported, and
has started work on a new production facility to manufacture critical components
for supersonic/high velocity missiles.
Goldman Sachs India
Exhibit 49: Defense order inflows constitute only a small portion of

the order inflows today; we expect only a gradual increase near
term, however defense orders have potential to substantially
increase over the medium term
Pinaka system order win drives higher order inflow in FY21; we do not
include the P75i submarine order in our base case currently
Defence Others
120%
100%
80%
60%
98% 99% 97% 96% 96%
40%
20%
2% 1% 3% 4% 4%
0%
FY19 FY20 FY21e FY22e FY23e
Others-represents orders ex-Defence
Goldman Sachs India
Autos and auto ancillaries: The best Make in India story has a long runway
for localization
Pramod Kumar This section has been authored by our India Automobiles team
+91 22 6616-9043
Also, see our concurrently published: India Automobiles: A $15bn localization
pramod.kumar@gs.com opportunity.
At over 40% of India’s manufacturing GDP and with exports at c.20% of 2W/car
production, we see automobiles as the best Make in India story. The industry imports
c.US$15bn of components annually, making it a significant player in the government’s
import localization plans. Incremental localization will impact component makers directly,
in terms of top-line growth, while for OEMs, the benefit is potentially lower costs, less
FX volatility and faster time to market. With rising tariffs / FX moves and geo-political
headwinds, the industry is fast-tracking localization plans, which could entail higher
investments in the near / medium terms but would strengthen the sector as a global
hub for small cars, 2Ws and components, in our view.
With BS6 and tougher safety norms in place, c.23%/c.15%/c.12% of car/CV/2W

content (direct + indirect sourcing) is imported, based on industry check and our
estimates. Collectively, this translates into c.US$10bn in annual imports for the car
industry (led by electronics, transmissions, body parts, and other components)
and US$5bn in annual imports for 2W and CV parts.
The export opportunity is quite significant, as 2W makers - Bajaj and TVS - already
export c.47% and c.26% of their production, respectively. Even for the car industry,
export volumes have stood at c.20% of overall production in the past two years. The
component makers offer a bigger export opportunity with 27% of revenue coming from
export markets such as Europe (33%) and the US (25%), as per ACMA. For example,
Bharat Forge gets over 55% of revenue from exports.
Localization a key priority

The companies cite the higher cost of imports, volatility in costs due to FX movements
and longer lead times as key reasons driving localization. The supply chain across
sectors was impacted during 1QCY20 due to the lockdowns in China. Sharp INR
depreciation has accelerated localization in the past.
Rising import hurdles in terms of rising duties and regulatory intervention are further
accelerating the localization plans. At the same time the government is incentivizing FDI
with lower tax rates (c.15%) on new manufacturing facilities, vs. c.25% for older ones,
and fast-tracking of approvals.

government schemes
The component makers are the biggest beneficiaries due to the revenue opportunity,
while OEMs benefit from potentially lower costs and reduced supply chain uncertainty
Goldman Sachs India
(duties, restrictions etc). Localization of 2W components should be faster due to lower

tech barriers, while for cars meaningful localization would happen with localization of
electronics and transmissions.
TVS Motor (Buy): TVS’s import exposure stands at c.15% (vs. peers 7-8%) led by
electronic components and advanced parts sourced from vendors (Fi/ABS parts and EV
parts). TVS aims to lower its import exposure by c.2% every year to lower costs,
improve time to market and reduce Fx volatility. TVS is expanding its presence in
2W/3W export markets (c.26%/of volumes/revenue) and is looking to grow it faster than
its domestic business.
Maruti Suzuki (Buy): Biggest car maker in India (50% market share) with import
exposure (direct+indirect) of c.15% of revenues, led by electronics and specialty steel.
Maruti management in their 1QFY21 call talked about an aggressive localization plan for
non-electronic parts over the next few years. Separately, Maruti is also looking at
stepping up its exports (6% of vols) through the Suzuki-Toyota alliance.
Mahindra & Mahindra(Buy): M&M stands to benefit from local sourcing of defense
equipment (mobility, aircrafts and radar systems). Moreover, the M&M-Ford JV aims to
localize and build compact SUVs in India for both Indian and global markets.
Bajaj Auto (Neutral): Largest exporter among Indian auto OEMs, with revenue
contribution of c.43% and strong presence in Africa, LatAm, Middle East and South
Asia. Bajaj owns 49% of KTM and KTM’s global 390cc and below portfolio is made in
India. Bajaj also has an alliance with Triumph to develop mid-sized motorcycles in India
for global markets.
Bosch Ltd (Sell): The listed Indian arm of Robert Bosch GMBH is working towards
localization of parts and technologies used for BS6 and EVs in India, along with other
unlisted Bosch’s Indian entities. However, Bosch Ltd currently has substantial import
exposure from Robert Bosch’s China JV Weifu High Technologies. The localization of
imports would result in significant revenue loss to Robert Bosch’s China JV.
Not Covered companies with potential exposure to the MII theme and associated
government schemes
Bharat Forge: One of the leading auto forging companies in the world with c.55%
revenue coming from exports. There have been recent restrictions on import of some
defense equipment, and we note that Bharat Forge has a diversified presence in
defense verticals with very high levels of localization.
Endurance Technologies: The company is working on localizing low cost ABS systems
and disc brakes in India, which have been mandatory for premium 2Ws since 2019.
Varroc: The company has formed a JV with Dell’Orto to localize and supply Fi units (for
2Ws), which have become necessary since BS6. The company is also ramping up its
electronics business to benefit from the increased demand for localized parts.
Goldman Sachs India
Minda Industries: The company has a wide array of products (alloy wheels,
infotainment systems, safety systems, sensors etc) and is hence exposed to a potential
increase in import duties/restrictions on after-market accessory imports.
Tyre companies: The government in Jun’20 put curbs on the import of tires used in
cars, two-wheelers and commercial vehicles, moving it from list of free imports to the
‘restricted’ category, as part of a strategy to buoy the domestic industry. MRF, Apollo
Tyres, Ceat and JK Tyre are the domestic-focused listed tyre companies that are
exposed to this.
Goldman Sachs India
Consumer: Apparel exports could be a large opportunity with the right

incentives
Aditya Soman This section has been authored by our India Consumer team
+91 22 6616-9345
Make in India: Textiles and apparel opportunity: India exported US$36.6 bn worth of
aditya.soman@gs.com textiles and clothing in the fiscal year ended March 2019, with imports of US$6.8 bn. We
Goldman Sachs India SPL believe recent trade disagreements elsewhere present an opportunity for India to pick
up some market share in global textiles and apparel exports. India is already the 2nd
largest textile exporter and the 6th largest clothing exporter in the world.
In textile exports, India gained global market share (280 bp) faster than most other large
Asian exporters except China (2,940 bp) between 1998 and 2018. On the other hand,
while India’s global share of clothing has grown by 80bp between 1998-2018, its share
gains have underperformed other Asian countries such as China (1,580 bp), Bangladesh
(460 bp), Vietnam (500 bp) and Cambodia (160bp). This underperformance is even more
stark between 2008-2018, when China lost share but most of the share lost was picked
up by Bangladesh, Vietnam and Cambodia.
Why has India underperformed in garment exports?
In terms of a regional shift, India has missed out to Vietnam in exports to North America
and to Bangladesh in exports to Europe. We think this underperformance in clothing has
largely been a function of four factors:
1. India has mid-range product pricing when compared with other Asian garment
exporters, with higher prices compared with Bangladesh/Pakistan/Cambodia, lower
prices than Sri Lanka and similar pricing to China and Vietnam and Indonesia.
Despite low labour costs and a well-developed cotton-textile-apparel supply chain,
Indian garment manufacturing suffers due to more dispersed and small scale of
manufacturing facilities, limited supply chain investments and lower productivity. In
addition, India faces higher import duties in markets such as the European Union
and Canada when compared with exporters such as Bangladesh, whose exports do
not attract any import duties.
2. Buyer perceptions of non-cost factors: Buyers perceive that India’s supply-chain and
logistics are weaker, especially when compared with China and Southeast Asian
countries, which offer faster lead times and greater reliability of supplies (see Exhibit
below). Also, buyers have a weaker perception of quality, social compliance and
sustainability than for China and Southeast Asia (see Exhibit below).
3. Lower focus on exports due to a larger domestic opportunity when compared with
smaller Asian economies, leading to higher import tariffs to protect domestic
markets from imports. This makes it more difficult to incorporate India in a global
supply chain even if labour costs are competitive.
4. Limited incentives for foreign investment have led to the textile and clothing sector
attracting less than 1% of the FDI directed to India over 2001-2015.
Goldman Sachs India
How can India gain share in global apparel exports?
While India can improve its cost of manufacturing, we think the main difference in
gaining market share is in softer factors that impact buyers’ perceptions of importing
from India. Three factors which could drive change:
1. More foreign investment in the textile sector, on the back of improving ease of doing
business, incentives for large-scale manufacturing and a tax structure suitable to fit
in the global supply chain. Indian firms also need to improve the diversity of their
manufacturing to reduce reliance on cotton products. This may be a contentious
policy change as it may require opening up India’s domestic apparel market to
imports and we think that consequently steps would need to be taken to ensure
domestic manufacturers remain competitive. To this extent, we think moves to
remove anti-dumping duty on polyester raw material in the FY21 budget are positive
in terms of allowing better integration with global supply chains. Additionally, we
note the government has announced several incentives for small industries and a
US$200 mn investment for developing technical textiles in India.

2. Improved logistics and supply infrastructure. Global buyers have noted extended
lead times in exports from India as well as the quality of infrastructure including
transportation, power and facilitation of global trade. Investment in these areas
could improve buyers’ perceptions and lead to increases in imports from India.
Power supply has gradually improved over the years though manufacturers still note
higher power rates in India. Additionally, the development of trade corridors could
reduce lead times.
3. Labour market reforms, including in terms of availability of skilled and unskilled
labour. Also the sector can drive better outcomes for women’s employment, as has
been seen in other Asian countries and even with Indian companies like Page
Industries.
Where does India differ from China and what needs to change?
Cost of manufacturing in India is actually similar to China. However it is the non-cost

factors where India lags China significantly, especially logistics, lead times, quality
perceptions and availability of skilled manpower.
Covered companies: Key beneficiaries from the MII theme and associated
government schemes
Aditya Birla Fashion & Retail (Buy): ADIA is one of the leading apparel manufacturers
in India, and we believe favourable policies for manufacturing and exports of apparel
from India can lower cost of manufacturing, which would allow India and ADIA to
compete with other exporters
Page Industries (Sell): PAGE owns the franchises for Jockey and Speedo in India, and
with favourable laws and taxation policies we think PAGE could lower its cost of
manufacturing, which could lower the price differential compared to unbranded players
in India.
Goldman Sachs India
Trent Limited: Trent owns a department store chain under the brands Westside and
Zudio in India, and also has a JV with ITX (Neutral, most recent close: €23.25, covered
by Richard Edwards) for its brands Zara and Massimo Dutti.
Arvind Limited: Arvind is one of the largest denim exporters from India.
Exhibit 50: India’s share in global textile exports has grown by 280 Exhibit 51: However, India’s share gain in global clothing exports
bps between 1998-2018... has lagged other Asian exporters such as China, Bangladesh,
Textile exports as a % of global exports for select Asian exporters Vietnam and Cambodia
Clothing exports as a % of global exports for select Asian exporters
Share of key Asian economies in global clothing Share of key Asian economies in global clothing
exports exports
60.0% 60.0%
50.0% 50.0%
3.4% 3.4%
40.0% 3.0% 40.0% 3.0%
30.0% 30.0%
20.0% 2.6% 20.0% 2.6%
10.0% 10.0%
0.0% 0.0%
1998 2008 2018 1998 2008 2018
China Bangladesh Vietnam India Indonesia Cambodia Pakistan Sri Lanka China Bangladesh Vietnam India Indonesia Cambodia Pakistan Sri Lanka
Source: WTO Source: WTO
Exhibit 52: A greater proportion of India’s garment manufacturers Exhibit 53: Although India fares a little better in textile
are small scale, even compared with other South Asian countries manufacturing
Proportion of small, medium and large garment manufacturing firms, Proportion of small, medium and large textile manufacturing firms (2016)
2016
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
India Bangladesh Sri Lanka Pakistan India Bangladesh Sri Lanka Pakistan
Small Medium Large Small Medium Large
Source: World Bank Source: World Bank
Goldman Sachs India
Exhibit 54: India has mid-level pricing despite buyers perceiving it to be high cost relative to other exporters
Average unit cost of select garments (US$)
12.0 25.0
10.0
20.0
8.0
15.0
6.0
10.0
4.0
5.0
2.0
- -
Pakistan Cambodia Bangladesh Indonesia India China Vietnam Sri Lanka World
Trousers Sweaters/sweatshirts Knit shirts Woven shirts Dresses and skirts Coats (RH axis)
Source: World Bank
Exhibit 55: Although India has mid-level costs, it fares poorly on buyer perceptions of speed, compliance and quality
Buyers’ perspective of competitive comparison between countries, 2016
Cost Speed Compliance Quality Total 50% weight to
cost - Total
Cambodia 3 2 2 2 9 15
Indonesia 2 3 3 2 10 14
Bangladesh 3 1 1 2 7 13
China 1 3 3 3 10 12
Vietnam 1 3 3 3 10 12
Pakistan 3 1 1 1 6 12
Sri Lanka 1 2 3 3 9 11
Myanmar 2 1 1 2 6 10
India 2 1 1 1 5 9
Source: World Bank
Goldman Sachs India
Exhibit 56: Manufacturing costs (including labour) are a small Exhibit 57: More complex apparel has higher labour cost
proportion of the selling price of a generic $14 t-shirt sold in North Artisinal children’s dress (manufactured in India and sold in the US)
America
Generic budget t-shirt (manufactured in Bangladesh and sold in
Canada), 2016
16 8.40 80
30.10
14 70
12 60
10 50
8 9.10
40
3.64 6.30 1.40
6 30 7.00
12.60
4 0.98 20
2 0.14 0.14 0.14 0.56 10 3.50
0 0
Source: ILO Source: ILO

Exhibit 58: The textile and apaparel sector employs almost 18 mn

people in India
Emloyment (mn)
20
18
16
14
12
10
8
6
4
2
0
FY12 FY13 FY14 FY15 FY16 FY17
Textile manufacturing Textiles and apparel sector
Source: Ministry of Textiles
Goldman Sachs India
Exhibit 59: Export growth has stagnated, especially for readymade garments
India trade in garments and textiles (US$, bn)
India trade in garments and textiles FY15 FY16 FY17 FY18 FY19
US$, bn
Exports
Readymade garments 16.83 16.97 17.37 16.71 16.18
Cotton textiles 11.75 11.13 10.43 11.19 12.43
Man-made textiles 5.83 5.21 5.15 5.39 5.56
Wool and woolen textiles 0.20 0.20 0.18 0.19 0.22
Silk products 0.14 0.10 0.08 0.07 0.08
Handloom products 0.37 0.37 0.36 0.36 0.34
Carpets 1.36 1.44 1.49 1.43 1.49
Jute products 0.37 0.58 0.32 0.34 0.33
Total 36.86 36.00 35.37 35.67 36.63
Imports
Readymade garments 0.52 0.58 0.60 0.78 1.11
Cotton textiles 1.79 1.71 2.08 2.45 2.07
Man-made textiles 2.29 2.13 1.97 2.26 2.67

Wool and woolen textiles 0.41 0.37 0.33 0.37 0.42
Silk products 0.22 0.21 0.21 0.25 0.20
Handloom products 0.01 0.01 0.01 0.01 0.02
Carpets 0.07 0.08 0.07 0.94 0.10
Jute products 0.17 0.25 0.24 0.18 0.17
Total 5.49 5.33 5.51 7.25 6.76
Source: Ministry of Textiles
Goldman Sachs India
Pharma: API opportunity is large and seeing global tailwinds
Shyam Srinivasan, CFA This section has been authored by our India Healthcare team
+91 22 6616-9346
shyam.srinivasan@gs.com API manufacturers could benefit in the medium term

The global API exports industry was worth US$74bn in 2019, growing c. 5% p.a. China
dominates the market, contributing c. 46% of global API exports supply. The top
destinations for Chinese API are India, US and Japan, as they source the raw material to
convert into finished dosage formulations. We believe India’s Active Pharmaceutical
Ingredients (API) manufacturers could benefit from Make in India friendly policies, as
they serve large domestic demand while also leveraging on export opportunities given
the backdrop of dual-sourcing requirements for global supplies.
Exhibit 60: China dominates the global API market Exhibit 61: India and USA are the biggest importers of Chinese API
2019 Global API exports: US$74bn API exports (US$ mn) % of total (RHS)
6,000 18.0%
Denmark Others 16.8%
16.0%
2% 15% 5,000
UK 14.0%
2% Italy 12.5%
4,000 12.0%
3% China
Germany
46% 10.0%
3% Ireland 3,000
3% 8.0%
Belgium 2,000 6.1% 6.0%
5%
4.8% 4.6% 4.6%
India 4.0%
USA 1,000 3.1%
5% 2.0%
10%
Switzerland
6% 0 0.0%
India USA Japan Germany Netherland S. Korea Brazil
Source: CCCMHPIE, Pharmexcil, Commtrade Source: DGCIS, CCCMHPIE, Commtrade
PLI scheme forecast to boost topline for local manufacturers by 400bps in
the medium term
We estimate the size of India’s API market to be at Rs670bn (US$9bn) in FY20, growing
at 10% pa over the past three years. After backing out DGCIS sourced imports, the
residual API that is manufactured domestically is at Rs428bn (US$5.7bn), or about
two-thirds the revenue share. China-manufactured API is at around 25%, while ROW is
the remaining 12%. Our model does not include API manufactured for captive
formulations and will likely under-estimate the level of backward integration efforts that
companies are pursuing. Based on commentary from the Trade Promotion Council of
India, even for locally manufactured API, up to 85% of the key starting material is from
China.
With an objective to attain self-reliance and reduce import dependence in critical key
starting materials (KSM), the Indian government introduced a production linked incentive
(PLI) scheme for 53 critical medicines, with a total outlay of Rs69.4bn (c. US$1bn) over
the next 6 years. Out of 53 identified bulk drugs, 26 are fermentation based bulk drugs
(antibiotics and niche KSM) while 27 are chemical synthesis based bulk drugs (essential
medicines for diabetes, cardio vascular, pain etc). The rate of incentive is 20 % (on
incremental sales over FY20 base) for fermentation based bulk drugs and 10% for
Goldman Sachs India
chemical synthesis based ones. The higher incentive for fermentation based drugs is
reflective of the production cost differential in our view, as exports from say China have
lower power/utility costs, common effluent treatment as well as access to lower-cost
funding. We believe the government’s push has witnessed early progress, based on our
industry checks, as formulators have been actively looking at alternate suppliers: Key
chemical API (DCDA/PAP/2-MNI/CDA) from China has already seen a decline of 17% in
FY20.
Exhibit 62: 53 critical medicines are 75% of all API imports Exhibit 63: Fermentation-based products get a higher incentive
Production-linked incentive scheme for API
India China
Drug imports (Rs bn) % of total API imports (RHS) Grant as % of incremental sales over FY20
90 35% 25%
80 32%
30% 20% 20% 20% 20%
20%
70
25% 15%
60
15%
50 20%
19%
10% 10% 10% 10% 10%
40 78 15% 10%
13%
30 5%
10%
20 9% 46 5%
32 5%
10 21
0%
0 0% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Antibiotics Niche KSM Key KSM Essential drugs
26 Fermentation based 27 Chemical Synthesis Fermentation Chemical synthesis
Source: Ministry of Commerce, Goldman Sachs Global Investment Research Source: Department of Pharmaceuticals
We forecast India based manufacturers to see accelerating API sales for FY21-26 (the
six years during which the PLI scheme was run), by seeing a progressive decline in
imports from China for these key drugs. The erosion in imports should be higher for
fermentation-based drugs and lower for the chemical synthesis ones. We believe
domestic manufacturers will see their top-line CAGR improve by 400bps from the 10%
over FY18-20 to 14% (FY20-26E) driven by this program. We forecast imports of API
from China decline by a 9% CAGR during this period, as we believe Chinese exporters
will likely respond to Indian-based manufacturers’ incentives with lower pricing, in an
attempt to retain share.
Goldman Sachs India
Exhibit 64: We forecast API localisation to increase top-line CAGR by 400bps for Indian manufacturers
India API market - split by country of origin
Rs billion FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY18-20 FY20-26E
India 357 390 428 471 558 647 734 825 916 10% 14%
China 132 168 164 155 142 126 113 102 94 11% -9%
Fermentation: Antibiotics 48 65 64 58 49 39 31 25 20 16% -18%
Fermentation: Niche KSM 14 16 15 13 11 9 7 6 5 3% -18%
Chemical: Key KSM 21 28 23 19 16 14 12 10 9 4% -15%
Chemical: Essential drugs 20 27 28 28 27 24 21 18 15 19% -10%
Others 30 32 34 36 37 39 41 43 46 7% 5%
Rest of world 60 81 77 81 85 89 94 99 104 13% 5%
Total market 550 638 670 707 785 863 941 1,025 1,114 10% 9%
Market share FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E
India 65% 61% 64% 67% 71% 75% 78% 80% 82%
China 24% 26% 25% 22% 18% 15% 12% 10% 8%
Rest of world 11% 13% 12% 11% 11% 10% 10% 10% 9%
Total market 100% 100% 100% 100% 100% 100% 100% 100% 100%
Growth (yoy) FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E
India 9% 10% 10% 18% 16% 13% 12% 11%
China 27% -2% -6% -9% -11% -11% -9% -8%
Rest of world 34% -4% 5% 5% 5% 5% 5% 5%
Total market 16% 5% 5% 11% 10% 9% 9% 9%
Does not include captive API production. API produced in India includes significant sourcing of KSMs from China
Source: DGCIS, Goldman Sachs Global Investment Research
API exports represent an additional lever for growth

The other lever that India’s API manufacturers are tapping into is the exports business,
which was worth around Rs300bn (India’s API exports) in FY20, growing c. 5% pa, as
per DGCIS data. Given that dual-sourcing mandates are starting to pick up for API, we
believe there is significant upside for India-made API exports to increase from the
current 5% global share in 2019 as India gains share from Chinese API. The two
combined (domestic and exports) represent close to a Rs1tn (US$14bn) opportunity and
growing at high single digits on a blended basis.
Exhibit 65: API is c. Rs1tn opportunity

FY20 API market opportunity
IPM
Rs 3,670 bn
Formulations API
Rs 2,700 bn Rs 970 bn
Domestic
Domestic Exports Exports
consumption
Rs 1,580 bn Rs 1,120 bn Rs 670 bn Rs 300 bn
Source: CRISIL, DGCIS, Pharmexcil, Goldman Sachs Global Investment Research
Availability of talent, consistent track record are key advantages

Availability of pharmaceutical talent as well as a proven track record of consistent
supplies, especially in generic drugs and high potency chemical APIs, are both
advantages which we think the Indian pharmaceutical industry has more runway to
develop on. The Indian government is targeting self-sufficiency in key
Goldman Sachs India
fermentation-based APIs and high-volume essential chemical starting materials. With

the right infrastructure and credit support, India’s pharma companies are looking to use
their differentiated technology platforms in API manufacturing to help lower average cost
of manufacturing even in more commoditized APIs, where China is the leader. However,
this could be a longer-term process and requires regular dialogue between industry and
policy-makers.
Cheaper raw materials and lower utility costs drive cost differential for
China
Our conversations with industry participants indicate that Chinese fermentation-based
API and key starting materials are 20-25%+ cheaper than Indian-made equivalents. We
attribute India’s higher cost of manufacturing on fermentation-based and commoditized
high-volume APIs vs China to three main reasons: (1) Power/fuel/water: Chinese bulk
drug manufacturing parks operate at larger scale and are therefore spreading shared
infrastructure costs (power/fuel/water) over a much larger base of volume. (2) Stage of
advancement of chemicals industry: China has a more advanced chemicals

manufacturing industry, which is critical for the development of scale in the
pharmaceutical industry, which is further downstream from chemicals. (3) Level of
credit support in ecosystem: Chinese companies engaged in API manufacturing are
mostly operating out of fully written down plants. Most of these companies have at
different points in time received credit support from policy-makers. Industrial land
allotment has also been a smoother process than in India. At a recent panel discussion
on Making Pharmaceuticals in India, participants from three API manufacturing
companies, Granules, Solara and Laurus Labs, communicated that credit cost
subvention schemes in China, though not the only factor, have been a significant
component in making large-scale manufacturing of high-volume APIs there sustainable.
Exhibit 66: Cheaper feedstock and lower power costs drive China’s Exhibit 67: China is the largest source of API imports for India
cost competitiveness pharma
As of 2019
Cost of production is at least 20% lower FY20 India API imports: US$3.4bn
100 Japan, 2%
Others, 11
90
Consumables, 3 Upkeep, 4
80 France, 2%
Labour, 9 Others, 8
Others, 15%
70 Power, 10 Upkeep, 3 Consumables, 3 Germany, 2%
Labour, 9
60
Power, 8 Spain, 2%
50 Singapore, 3%
40 Italy, 3%
Raw materials, China, 68%
30 63 Raw materials, USA, 4%
20 51
10
0
India China
G % f
Source: KPMG Source: DGCI
Goldman Sachs India

government schemes
Aurobindo and Sun could benefit on API; DIVI on custom synthesis
Aurobindo Pharma (Buy): Aurobindo Pharma is one of India’s largest exporters of

generic pharmaceuticals. It has the broadest product portfolio among Indian companies
operating in the US and Europe and consequent scale makes it a potential beneficiary
from the PLI scheme announced by the government for API localization. Management
has been assessing this scheme since the end of March 2020 when it was announced,
as Aurobindo has 21 molecules which overlap with the list.
Sun Pharma (Sell): Sun Pharma is India’s largest pharmaceutical company, with an
increasing focus on specialty pharmaceutical and biologics products. Its scale and focus
on both the domestic India market (market leader) and emerging markets make a case
for participation in the PLI scheme, as there are ~14 molecules in its API portfolio which
overlap with the list framed by the government.
Divi’s Labs (Buy, on CL): Divi’s Labs is one of the best ways to get exposure to the
India CMO and generic API industry, in our view. The company looks well-positioned to
benefit from a shift in global API sourcing. Its differentiated business with exposure to
custom manufacturing looks likely to represent a more sustainable opportunity for
localization, given that this is not a high volume segment (but high value). For custom
manufacturing, price consideration is less important than factors like turnaround time
and reliability of supply, helping Divi’s localization efforts.
Exhibit 68: Aurobindo and Sun Pharma seem to have the maximum # of DMF that overlap with the API incentive scheme on 53 announced
molecules
DMF mapping with 53 critical medicine
https://wwhttps://www.aartidrughttps://wwhttp://wwwhttp://wwwhttps://www.pharmacomhttp://sola https://wwhttps://wwhttps://www.pharmacomhttps://vbs
Jubilant Aarti Vivimed Shilpa
Aurobindo Sun Pharma Lupin Dr. Reddy’s Cipla Divi’s Alembic IPCA Granules Laurus Glenmark Solara Hikal Neuland IOL Biocon
Life Drugs Labs Medicare
1 Amoxicillin API
2 Azithromycin API API API API
3 Erythromycin Stearate / Estolate API API
4 Ceftriaxone API API
5 Cefoperazone API
6 Cefixime API API
7 Cephalexin API API
8 Piperacillin Tazobactam API
9 Sulbactam API
10 Dexamethasone
11 Prednisolone
12 Metformin API API API API API API API API
13 Gabapentin API API API API API API API
14 Rifampicin API
15 Vitamin B1
16 Vitamin B6
17 Clindamycin Phosphate API
18 Clindamycin HCL API API
19 Streptomycin API
20 Neomycin
21 Gentamycin
22 Doxycycline API
23 Potassium Clavulanate
24 Oxytetracycline
25 Tetracycline
26 Clarithromycin API API
27 Betamethasone
28 Ciprofloxacin API API API API API API API
29 Losartan API API API API API API API API API
30 Telmisartan API API API API API API API API API API API
31 Artesunate API API API
32 Norfloxacin API
33 Ofloxacin API API
34 Metronidazole API
35 Sulfadiazine
36 Levofloxacin API API API API API API API API
37 Meropenem API
38 Paracetamol API
39 Tinidazole API
40 Ornidazole API
41 Ritonavir API API API API API
42 Diclofenac Sodium API
43 Aspirin
44 Levetiracetam API API API API API API API API API API
45 Carbidopa API
46 Levodopa API
47 Carbamazepine API API
48 Oxcarbamazepine API API API
49 Valsartan API API API API API API API API API API API
50 Olmesartan API API API API API API API API API
51 Atorvastatin API API API API API API API API
52 Acyclovir API API API
53 Lopinavir API API API API
Total 21 14 12 10 10 9 9 8 8 7 7 5 5 4 4 3 3 2 2 0
Source: Company data
Goldman Sachs India
Aarti Drugs, Alembic Pharma and Solara: These companies are all API focused scale
players with market leadership in disparate molecules that are a key focus. In public
calls held since the announcement of the PLI scheme, all have indicated business cases
for participation in the scheme or signs of improvement in the regulatory environment
(faster approvals for proposed API capacity etc).
China API Industry evolved due to advantages

We would like to thank our Our China healthcare team believes the local API industry was not really driven by
China Pharmaceuticals:
government initiatives, but more by low entry barriers, such as: 1) China’s less strict
Research Analysts - Ziyi
Chen and Jian Gong for pollution regimes in early stages of industry growth, and 2) leveraging lower labour
their contribution to this costs in China to produce APIs. Along with the industry upgrades, API manufacturing
section has been relocated from city centers to urban areas, from top-tier to lower-tier cities,
and the government is implementing higher pollution control regulations, which has led
to consolidation of API businesses in China.
Chinese API prices declined between 2013 and 2017, amid intense competition among
the players. Starting from 2015, the Chinese government tightened oversight on
industrial pollution in response to environmental concerns, which accelerated in
2017/18. This led to significant pullback in supply growth and Chinese API prices started
inching up in 2018 and 2019. Following the impact of COVID-19, we saw tighter supply
conditions and logistic disruptions push up prices, especially in those bulk drugs where
China dominates (antibiotics and fermentation-based products).
Goldman Sachs India
IT/SaaS: Large talent pool and scale of IT services industry, harbinger for
SaaS growth ahead
Sumeet Jain This section has been authored by our India IT Services team
+91 22 6616-9160
IT spending in India is low, at just 1.9% of GDP, vs the global figure of 2.9% and highs of
sumeet.x.jain@gs.com 6.3%/5.4% of GDP in the UK and US, respectively. This implies significant scope for
Goldman Sachs India SPL increases in technology spending by Indian enterprises as they adopt more digital tools.
Over the past two decades, India’s IT services industry has seen a strong 20% CAGR,
growing from revenue of US$5.5bn in FY2000 to US$191bn in FY2020, led largely by
exports. Indian government incentives to the industry around creation of SEZs (Special
Economic Zones) with tax benefits helped propel the growth of the industry. Going
forward, apart from export-driven growth, we see Indian IT services companies
participating pro-actively in India’s digital initiatives (on areas such as GSTN (Goods &
Services Tax Network), Taxation, Passports, MNREGA (Mahatma Gandhi National Rural
Employment Guarantee Act), India Post, various large banks using IT services
companies for their core banking products, like SBI using TCS BaNCS, ICICI using INFY’s
Finacle) as well as around SaaS (Software-As-A- Service). In 2019, the Government of
India approved the National Policy of Software Products to make India a big center for
software products by 2025 with primary focus on IP creation and up-skilling. India’s
large engineering talent pool is trained on various digital technologies; in our view, this
should be a key enabler for Make In India initiatives across industries.
Exhibit 69: Compared with other countries, India’s IT spending as a % of GDP is small, and Gartner expects growth at a CAGR of 7.4% over
2020-24
Country 2019 GDP IT Spend as % of 2020-24
(ranked by 2019 GDP) (in US$bn) GDP in 2019 IT Spend CAGR
1 USA 21,428 5.4% 7.1%
2 China 14,343 1.6% 7.7%
3 Japan 5,080 5.1% 3.0%
4 Germany 3,846 3.3% 5.0%
5 India 2,895 1.9% 7.4%
6 United Kingdom 2,827 6.3% 6.9%
7 France 2,707 3.3% 5.0%
8 Italy 2,001 2.4% 2.8%
9 Brazil 1,840 2.2% 4.3%
10 Canada 1,736 4.4% 8.3%
11 Russia 1,702 1.0% 6.5%
12 South Korea 1,642 2.8% 5.7%
13 Spain 1,394 3.1% 4.6%
14 Australia 1,386 4.7% 8.7%
15 Mexico 1,259 2.4% 4.9%
Global 142,006 2.9% 6.0%
IT spending: IT spend by country only includes Enterprise IT spend; Worldwide IT spend includes Enterprise + Small and Mid size Businesses (from Gartner)
Source: Euromonitor, Gartner
Goldman Sachs India
India’s SaaS market: Potential to grow 6x by 2025
Historically, Indian IT was primarily involved in lower-value outsourcing work, which

involved less Intellectual Property, and labour cost arbitrage being the key value
proposition. However, over the last few years, Indian IT services companies along with a
large number of startups have invested heavily in digital services, platforms and
products to move up in the value chain. For instance, some marquee core banking
software products like TCS BaNCS and INFY’s Finacle are now offered “As-A-Service”
hosted out of cloud. Given the increasing acceptance of the ‘as-a-service’ model globally
and the nascent stage of the Indian SaaS (Software-as-a-Service) industry, we believe
SaaS has the biggest growth runway in India over the next few years (see section
below). With concerns globally around data security (India banning Chinese Apps,
US/China trade issues, etc.), the Indian Government’s push to digitize the economy and
‘Make in India’, and availability of PE/VC funding; we think the SaaS market could be a
big beneficiary with a fast-growing domestic, as well as export market. India’s SaaS
industry has seen stellar growth over FY18-20, with a 29% CAGR taking the total
market size of the industry to US$3.5bn (FY20). Pure-play Indian SaaS companies make
up over 70% of the total market in FY20, with global SaaS companies selling their
solutions in India comprising 16-18% and Indian IT service providers accounting for the
rest. Exports from India for these SaaS companies comprise about 75% of the total
India SaaS revenues in FY20, with the rest coming from the domestic market. We
expect acceleration of digitalization post COVID-19 could further boost revenue growth
for India’s SaaS industry over the near to medium term. NASSCOM expects pure-play
India SaaS revenues to grow 6X by FY25 to reach US$13-15bn, implying a CAGR of
c. 40% over the same period.
The global SaaS market is currently worth c. US$100bn (FY20) and is dominated by US
companies that make up around 60% of the overall market. Gartner expects the global
SaaS market to double by FY25, growing at a 15% CAGR. The top 5 SaaS vendors
globally (Microsoft, Salesforce, Adobe, SAP and Oracle) make up over 50% of the total
global SaaS market currently. India pure play SaaS players’ market share in the global
SaaS market, at 2.5% currently, is expected to reach 7% by FY25 (as per NASSCOM).
Exhibit 70: India’s SaaS market has grown at a 29% CAGR over the Exhibit 71: 75% of the total India SaaS revenues came from exports
past two years and is currently at US$3.5bn in FY20
India SaaS Revenues ($bn) FY20

4.0
3.5
3.5
3.0
2.5 Domestic, 25%

2.1
2.0
1.5
Exports, 75%
1.0
0.5
0.0
FY18 FY20
Source: NASSCOM Source: NASSCOM
Goldman Sachs India
Exhibit 72: Pure play Indian SaaS companies make up over 70% of Exhibit 73: ...which has potential to grow to US$13-15bn (or 6x) over
the total market currently... the next five years
FY20 India Pureplay SaaS Revenues ($bn)

Indian 16 15
Service
Providers, 14
$0.4bn 13
12
Global SaaS, 10
$0.6bn
8
6
Pureplay Indian
SaaS, $2.5bn
4
2.5
2
0
FY20 FY25E
Source: NASSCOM Source: NASSCOM
India’s competitive advantages

n India’s large talent pool of software developers is a key competitive advantage

driving the super-normal growth of the SaaS market. As of 2019, India had more than
3 million software developers, of which more than 100,000 were SaaS developers.
n Indian SaaS products are also priced substantially lower (1/4th) than US or European
SaaS products, given i) lower compensation per developer in India (1/5th vs US); ii)
use of reusable IPs, codes and processes which reduces the overall product cost by
40%; and iii) lower infrastructure costs vs global SaaS companies.
n India has a thriving SaaS ecosystem, with more than 75 companies generating an
Annual Revenues Run-rate (ARR) of > $5mn as of FY20.
n India’s mature IT services industry, with a global presence spanning over three
decades.
Goldman Sachs India
Exhibit 74: We believe India’s technology employee wage differential over DMs, particularly vs US/EU, will
remain significant over the next two decades
140,000 India US Singapore Beijing Kuala Lumpur Manila 137,975
Operating cost per employee (US$) per annum

120,000
107,786
100,000
84,202 2.8x
80,000
65,779 3.9x
60,000
Singapore, 57,000
5.2x
Beijing, 42,000 49,564
40,000 4.8x
Kuala Lumpur, 36,000
20,000 27,676
Manila, 20,000
13,654 16,318
Source: NASSCOM, MyVisaJobs, FactSet, Goldman Sachs Global Investment Research
Exhibit 75: India has focussed on re-skilling its technology

professionals, leading to a large pool of digitally skilled technology
professionals
120,000 Number of Digitally skilled developers in India (2019)
100,000
100,000
80,000
60,000
40,000
20,000 18,000
20,000 17,000
0
SaaS Developers AI Developers RPA Developers IoT Developers
Source: NASSCOM
India SaaS: Government’s push to drive growth

In 2019, the Government of India approved the National Policy of Software Products to
make India a big centre for software products by 2025. The key missions include:
n To promote the creation of a sustainable software products industry driven by

Intellectual Property (IP) leading to a ten-fold increase in share of the global software
products market by 2025.
n To nurture 10,000 technology start-ups in the software products industry including
1,000 such startups in Tier-II and Tier-III towns & cities and generating direct and
indirect employment for 3.5mn people by 2025.
Goldman Sachs India
n To create a talent pool in the software products industry through up-skilling.
There is also a strong government push for procurement of made in India SaaS
products, and digitization of MSMEs through India SaaS.
India currently has more than 150 companies generating over $1mn Annual
Revenue Run-rate (ARR).
Exhibit 76: Largest private players (in terms of revenues) currently in the India pure play SaaS market
Company Business description/product offerings ARR (US$ mn)
Zoho CRM, Email & Collaboration, HRM, Analytics, Accounting 350-400
Freshworks Sales CRM, Email & Collaboration, IT Services Management, Project Management 100
Icertis Contact Management software 100
Druva Data Protection & Security, Data Storage & Management 100
HighRadius Fintech software for treasury management and cash receivables management 50-100
RateGain Real-time intelligence for travel and hospitality industry 50-100
BrowserStack Web and Mobile testing platform 50-100

Tally ERP software 50-100
Postman Collaboration platform for API development 40
Wingify Experience optimization for businesses with online visitors 10-50
Exotel Cloud Telecphony services 10-50
Eka Commodity management platform 10-50
Capillary Omnichannel Customer engagement, eCommerce platform 10-50
Zenoti Business management software for Spas, Saloons, Yoga centres and fitness centres 10-50
Manthan AI and Analytics solutions for Consumer businesses 10-50
Source: NASSCOM, CrunchBase, Press Articles
In terms of covered companies that we think could be key beneficiaries from the MII
theme and associated government schemes, we note that companies within our
large-cap coverage have also developed their own SaaS offerings which are likely to
benefit from the exponential growth of the SaaS market in India. The SaaS products of
India IT service companies include TCS (Buy) – ignio and BaNCS, Infosys (CL Buy) –
Finacle, Wipro (Sell) – Holmes and HCL (Neutral) – AGORA. Apart from these, the
companies under our coverage are also ecosystem partners for some of these SaaS
vendors and have also made early stage investments in the same, which should also
benefit from the growth of the SaaS market in India.
India IT services market: Increasing participation in the domestic market

While not a direct beneficiary of ‘Make in India’, we think the domestic IT Services
spend (both government and private) is likely to benefit, given ‘digitization’ is seen as a
key infrastructure backbone to execute ‘Make in India’. On the government side, this is
already evident from some recent deal wins by larger Indian IT players from various
government bodies around social media analytics and digitization of passport, taxation,
MNREGA, Smart Cities etc. Also, corporates which are direct beneficiaries of ‘Make in
India’ are likely to invest in IT to compete on technology and costs with global peers.
With the outlook on Domestic spend improving, partly due to ‘Make in India’, we think
larger companies are likely to invest and take market share, and see TCS (given its scale
Goldman Sachs India
– with the highest market share of 8%) and Tech Mahindra (given its exposure to 5G,
telecom) as the biggest beneficiaries.
India currently generates US$135bn from IT-BPM exports (as of FY20), while the
domestic IT-BPM market has annual revenues of US$15.4bn (as of FY20). We believe
the post-COVID-19 era will bring another wave of outsourcing as global enterprises look
to reduce costs. Digital technologies are gaining scale, and late cycle beneficiaries like
India IT are likely to benefit as enterprises get more comfortable with the concept of
offshoring due to an extended remote working period during the pandemic. We believe
this, combined with cyclical factors like the pick-up in global growth, are likely to lead to
a phase of low- to mid-double-digit growth for the industry over the next three years. For
more details see our recent report India Technology: IT Services: Dawn of another
Outsourcing Wave, TCS up to Buy; Buy INFY/TechM (both on CL).
We have seen increased participation on key projects for digitization of India by large
Indian IT service companies recently. Some examples include:
n L&T Infotech’s US$100mn deal from the Central Board of Direct Taxes India to use
social media analytics to identify tax non-compliance.
n TCS has been involved with multiple government digitization initiatives including
Passport, MNREGA and India Post projects.
n Large Indian banks use core banking software of Indian IT service companies, like
State Bank of India uses TCS BaNCS, and ICICI Bank use Infosys’s Finacle.
n Tech Mahindra is involved in multiple smart city projects in India and has recently
partnered with SAP and AWS to bring India’s government services into the cloud.
The domestic India IT services market is expected to grow at a 7% CAGR over the next
5 years, as per Gartner, and we think ‘Make in India’ could potentially accelerate that
growth, closing the gap with China (expected to grow at a 12% CAGR over the next 5
years, as per Gartner). While Indian IT companies are key players in the export market,
the domestic market size of India’s IT services sector is only 1/3 that of China, and
spend on IT is around 1.9% of GDP (vs ~3% globally). Also, India’s domestic market is
much more fragmented, with the Top 4 domestic players accounting for only 15%
market share, compared to China where the Top 4 players account for ~30% market
share. With the outlook on domestic spend improving, partly due to ‘Make in India’, we
think larger companies are likely to invest and take market share.
Goldman Sachs India
Exhibit 77: China’s domestic IT services market is 3X India’s size
90,000 India IT Services Market ($mn) China IT Services Market ($mn)
80,000 80,871
70,000 69,607
60,000 59,480
52,864
50,000
47,379
44,938
40,000 38,974
32,480
30,000
23,528
20,000
21,821
17,417 19,502
10,000 14,094 15,410 14,727 15,816
13,078
10,869
0
2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E
Source: Gartner
Exhibit 78: Key Indian and global players in the India IT services domestic market
2019 Revenues 2019 Market % of IT Services Last 3 year

Company
($mn) Share Revenues CAGR
Indian IT services companies
TCS 1,237 8.0% 5.8% -2%
Wipro 541 3.5% 6.4% -3%
Infosys 307 2.0% 2.5% 18%
TechM 301 2.0% 5.8% 20%
LTI 97 0.6% 6.6% 21%
KPIT 93 0.6% 31.2%
Mphasis 65 0.4% 5.4%
ITC Infotech 47 0.3% 15.6%
Mindtree 43 0.3% 4.0%
NIIT Tech 38 0.2% 7.0%
Hexaware 38 0.2% 4.8%
Global IT services companies
IBM 986 6.4% 2.2% 4%
Deloitte 670 4.3% 2.1% 14%
EY 524 3.4% 2.7% 13%
PwC 447 2.9% 2.0% 14%
Amazon 423 2.7% 1.9% 106%
Hitachi 422 2.7% 3.4% 36%
Source: Gartner, Company data
Goldman Sachs India
Exhibit 79: China’s IT services market is primarily dominated by local players
2019 Revenues 2019 Market % of IT Services Last 3 year

Company
($mn) Share Revenues CAGR
China Telecom 5,321 11.8% 100.0% 21%
Alibaba Group 3,282 7.3% 80.8% 70%
Huawei 2,847 6.3% 79.0%
China Mobile 1,732 3.9% 100.0% 13%
Chinasoft International 1,661 3.7% 94.9%
Digital China 1,515 3.4% 100.0%
China Unicom 1,349 3.0% 100.0% 15%
Tencent 1,195 2.7% 95.0% 87%
Deloitte 1,185 2.6% 3.8% 15%
IBM 1,126 2.5% 2.5% 2%
KPMG 1,114 2.5% 7.7% 17%
Jingdong 1,053 2.3% 100.0%
Source: Gartner
Goldman Sachs India
TMT: Smartphone manufacturing to get incremental push
Manish Adukia, CFA This section has been authored by our India Telecommunications team
+91 22 6616-9049
India is the world’s second-largest smartphone market, with a base of 450 mn
manish.adukia@gs.com subscribers as of FY20 (March 20), and annual smartphone shipments of c.150 mn. At
Goldman Sachs India SPL an ASP of US$160-170, this translates into a US$25 bn annual smartphone market.
However, India is heavily reliant on imports in this category; while the number of fully
imported mobile handset units continues to come down to less than 10% of total
mobile phone demand in India in FY19 (link), or c.20% of total smartphone demand per
GSe, more than 80% of components for smartphones are sourced abroad. We note that
this proportion continues to see a declining trend (it was 90% two-three years ago), but
also note local sourcing remains low-to-negligible for components that require high
technical know-how such as Printed Circuit Boards (PCBs), camera modules, displays,
etc. Thus while most smartphone brands state that a large proportion of their products
are locally manufactured, such manufacturing is restricted to low value-add components

such as accessories, and assembly of smartphones.
We believe for the entire manufacturing supply chain to move to India will be a gradual
process, and will likely require significant amount of investment. The Government of
India recently announced a Production Linked Incentive scheme (PLI) for manufacturing
of electronics. This entails incentives of 4-6% on incremental sales (over base year
FY20) of goods manufactured in India, with up to Rs410 bn (US$5.5 bn) of incentives
over five years. This could potentially translate into >US$100 bn of incremental
smartphone/electronics manufacturing in the country over this period of five years. Per
press reports, Samsung, and contract manufacturers of Apple, such as Foxconn Hon
Hai, Rising Star, Wistron and Pegatron, have noted interest in this scheme. In addition,
seven domestic firms have applied for this scheme, with names such as Lava Group,
Dixon Technologies, Bhagwati (Micromax), among others.
We expect the incentive scheme to provide a push to domestic electronics
manufacturing. The Government of India has said that US$150 bn of mobile components
etc. will be manufactured as part of this scheme, including US$60 bn worth of exports.
The government expects domestic value addition for smartphones to move from
low-teens at present to 35-40%. Per press reports, Samsung is likely to move part of its
smartphone production in India, with plans to make US$40 bn of smartphones over the
next five years, including US$25 bn of handsets in the >US$200 category, mostly for
exports.
Within our India coverage, in terms of key beneficiaries from the MII theme and
associated government schemes, we note that Reliance Industries (Buy, on Conviction
list), which has announced plans to manufacture 4G/5G smartphones in partnership with
Google, can potentially benefit from lower costs as supply chains move to India.
Per our estimates, domestic manufacturing faces a cost disadvantage of 10-15% vs

other countries such as China and Vietnam, and thus we remain uncertain on the extent
to which the PLI scheme will help move electronics manufacturing to the country.
Goldman Sachs India
However, we see this as a step in the right direction. In addition, we note that the Indian
Government is also adopting the approach of levying additional duties on incremental
imports of certain products; for example, India recently levied a 10% safeguard duty on
single mode optical fiber; we note companies such as Sterlite Technologies (Not
Covered) have exposure to this area.
Goldman Sachs India
Logistics: A key enabler for Make in India
Pulkit Patni This section has been authored by our India Industrials and Utilities team
+91 22 6616-9044
One of the roadblocks to an acceleration in manufacturing in India has been the
pulkit.patni@gs.com relatively inefficient freight road and rail infrastructure, and warehousing. Total logistics
Goldman Sachs India SPL costs in India as per the RBI are ~14% of GDP (compared to 8.5% for the US and 18%
in China) in 2016, and inventory holding costs in India are 6.9% of GDP (above China at
6.5%, and the US at 3%). However, the government has pushed investments in building
out rail infrastructure (with the Dedicated Freight Corridor), Waterways (under the
Sagarmala Project), and Road network (under the Bharatmala Project) to improve the
logistics infrastructure, which could provide the required impetus to the manufacturing
sector in India over the medium to long term.
Waterways: Developing inland and port infrastructure (Sagarmala Project)

The Sagarmala Project is a GoI initiative to unlock the logistics potential of waterways
and the Indian coastline to boost manufacturing in India, and the scheme entails
numerous initiatives including setting up new ports, modernizing India’s existing ports,
developing Coastal Economic Zones (CEZs), and improving road/rail connectivity to
ports. Given that waterways have the lowest transportation cost (per tonne), and India’s
waterways have remained under-utilized compared to other countries, significant
investments and development under the Sagarmala Project could help lower logistics
costs and provide a boost to manufacturing in India.
Exhibit 80: Major projects under Sagarmala and other key infrastructure projects
National Waterways (NW) Development

• NW 1 - Financed by the World Bank
• NW 2,4 and 5 to be developed from 2018-2023
• Multi modal terminals - Varansi, Sahibganj and Haldia
Sadiya
Allahabad Sahibga
nj Dhubri
Varanasi
Ahmeda
bad
Vadodara
J Talcher
Haldia
N
P Paradip
T
• Talcher to Dhamra/Paradip
Pune waterway development
• Heavy haul rail corridor from Talcher -
Hyderabad Paradip
• Ahmedabad to Mumbai road construction
• JNPT port road network decongestion
• Sanathnagar industrial cluster in Hyderabad
to JNPT road construction Road
Oil pipeline
Rail
Waterway
Multi Modal Terminal
Source: Infrastructureindia.gov.in
Goldman Sachs India
Railways: Dedicated Freight Corridor

Dedicated Freight Corridor: The Dedicated Freight Corridor (DFC) is one of the largest
infrastructure projects undertaken by Indian Railways. Dedicated Freight Corridor
Corporation of India (DFCCIL) is a special purpose vehicle (SPV) set up under the
Ministry of Railways responsible for constructing ~3,300km of high-speed railway
corridors dedicated only for freight movement along Delhi-Mumbai (Western Dedicated
Freight Corridor) and Delhi-Kolkata (Eastern Dedicated Freight Corridor) at a total cost of
roughly INR 900 bn (US$16bn).
Currently, the passenger and freight traffic runs on the same Indian Railways network,
leading to delays and higher costs. We think once the DFC is fully operational, it should
significantly reduce both the transit times and the cost of transporting goods, which
could make manufacturing in India more attractive. Also, currently 76% of the container
volume for the western ports is transported by road, and we believe the DFC would help
rail gain market share from roads, and help reduce logistics costs further. Project details
and our expectations for the Western DFC are shared below.
Exhibit 81: Despite manufacturing being a small component in Exhibit 82: Currently hinterland evacuation is dominated by road,
India’s GDP, logistics costs are high, indicating the inefficiencies with 24% of total containers being transported by rail currently
in logistics historically - CY2016 (FY2015)
Total Logisitcs cost as % of GDP Logisitcs cost(ex-inventory cost) % of GDP 120%

Rail share in Container evacuation by
0.2%
20%
18.0% 100%
18% 20% 25%
16% 80%
13.8%
14%
72%
Port
11.5% 60%
12%
100% 100% 99.8%
10% 8.5% 40% 80% 75%
8% 6.9%
5.5%
6% 20%
28%
4%
0%
2%
Mumbai J.N.P.T. Kandla Mundra Pipavav Hazira
0%
India China USA Road Rail
Source: RBI Source: Ministry of Shipping, Goldman Sachs Global Investment Research
Exhibit 83: Salient features of the DFC

Feature Existing On DFC
Moving dimensions
Height 4.265m 7.1m for WDFC, 5.1m for EDFC
Width 3200 m 3660 m
Container Stack Single Double
Train Length 700 m 1500 m
Train Load 5,000 ton 13,000 ton
Design features
Axle Load 22.9t/25t 25t, designed to go up to 32.5t
Track Loading Density 8.67t/m 12t/m
Maximum speed 75 Kmph 100 Kmph
Station spacing 7-10 km 40 km
Signaling Absolute/Automatic with 1 km spacing Automatic with 2 km spacing
Source: DFCCIL, Goldman Sachs Global Investment Research
Western Dedicated Freight Corridor
n The Western Dedicated Freight Corridor covers a distance of 1,504 km of double line
Goldman Sachs India
electric (2X 25 KV) track from JNPT and is being built in two Phases (Phase-1
Rewari-Vadodara and Phase-2 Vadodara-JNPT and Rewari-Dadri).
n Traffic: The Western Dedicated Freight Corridor should mostly cater to container
traffic between various western ports (JNPT, Mundra and Pipavav) and the northern
hinterland (Inland Container Depots of Dadri, Ludhiana, Tughlakabad). Indian
Railways estimates that close to 80% of the traffic on the WDFC would be
container traffic.
n Funding: The Western Dedicated Freight Corridor has received a JPY645 billion loan
from JICA (Japan International Cooperation Agency) (Phase I - JPY349 billion, Phase
II - JPY296 billion).
n We expect the container volume on the western DFC to reach ~6 mn TEUs by
FY2023 as we incorporate that rail share would increase to 35% from the current
24%. This would be 40-45% of the total containers handled by Indian ports. We
expect all the cargo from western ports meant for the north hinterland that currently
moves through Indian Railways to move to the Dedicated Freight Corridor, which
would ensure lower transit times. Also, we believe that DFC will provide a significant
challenge to the road sector as payloads permissible under the DFC for double
stacking will be 80 tons as compared to 61 tons under the current railway
infrastructure. Hence, the per-unit cost of transportation under railways will come
down meaningfully.
Exhibit 84: Salient features of the WDFC

WDFC Project State Length (km) Funding
Haryana 81
Loan of JPY349 bn
Phase-I, Rewari-Vadodara Rajasthan 551
from JICA
Gujarat 321
Total 953
Gujarat 244
Maharashtra 177
Phase-II, Vadodara-JNPT & Rewari- Loan of JPY296 bn
Haryana 96
Dadri from JICA
Rajasthan 16
Uttar Pradesh 19
Source: DFCCIL, JICA
Robust highway network created
India has one of the largest road network in the world, spanning about 5.9mn kms.
These are a mix of rural roads, state roads and national highways. Highway construction
in India has increased at a 21% CAGR between FY16-19. In FY19, about 11000 kms of
highway was constructed. In April 2020, the Government has set a target of Rs15tn in
road construction over the next few years. We believe this in also a key enabler as wide
and dense road network reduces cost of transportation by reducing time to market.

government schemes
n Adani Port and SEZ (Buy): Adani’s biggest port Mundra will connect to the Western
DFC at Palanpur. The Palanpur section of the Western DFC is expected to be
completed by March 2021, with full commissioning by FY23. With 23% market
Goldman Sachs India
share in India’s overall port volume, APSE will benefit from the string of ports across
India’s coastline.
n Gujarat Pipavav Port (Buy): Gujarat Pipavav Port is India’s second-largest listed port
company. It has net cash, a stable profitable business, a solid dividend payout and a
strong foreign promoter. Pipavav Port will connect to the Western DFC at Mehsana
(near Palanpur). There is a line from Pipavav to Surendernagar (264 kms) which is
currently under construction. Surendernagar to Mehsana is a feeder line that will
further connect to the DFC accordingly. The Palanpur section of the Western DFC is
expected to be completed by March 2021, though with full commissioning some
time away.
n Container Corporation of India (Neutral): In our report, BRICS ‘I’ view: Doubling
up on the DFC (Oct 10, 2013), we articulated how Concor would likely benefit from
the DFC, GST and the multi-modal logistics parks. Now we have more details on the
DFC, with the project expected to commission over the next 24 months. We expect
Concor to be the primary beneficiary of the Western DFC, as its volumes could
double on the DFC. With the commissioning of the DFC, we expect the market
share of rail in freight transport of EXIM containers at the western Indian ports to
increase from 24% (FY19) to 31% by FY22E (when we expect DFC to be partially
open) and then to 35% by FY23E (when we expect DFC to be fully operational).
Goldman Sachs India
TP methodologies & risks

Exhibit 85: Target price methodologies and risks
Current Price 12- month TP

Company Rating TP methodology Risks
(Rs.) (Rs.)
P/E (50%): 32x FY22E Upside: Faster-than-expected sales growth. Faster-than-expected

Page Industries Ltd. Sell 18,877 12,119
DCF (50%): WACC: 11.1%, TG: 4% formalization of innerwear segment, higher-than-expected margins
Aditya Birla Fashion P/E (50%): 32x FY22E Downside: Higher-than-expected competition from international brands,
Buy 134 171
and Retail DCF (50%): WACC: 9.9%, TG: 4% online players and potential intercorporate transactions
Lower-than-expected growth, sharp spike in JPY, failure of new

Maruti Suzuki India Buy 7,051 6,763 SOTP on FY22 estimates
launches, sharp spike in commodity prices, and increase in competition
Lower-than-expected growth, failure of launches, sharp spike in

TVS Motor Buy 455 540 SOTP on FY22 estimates
commodity prices, industry price war
Mahindra & Weak rural demand, drought in FY21-22, spike in commodity prices,
Buy 614 698 SOTP on FY22 estimates
Mahindra failure of new launches, rising costs of diesel vehicles
Sharp movement in USD/commodity prices, demand surprise in

Bajaj Auto Neutral 2,941 3,183 12.2x EV/EBITDA on FY22 estimates 3Ws/premium motorcycles, launch of scooters and new launches from
competition
Higher-/lower-than expected demand, lead prices, price war and

Bosch Ltd. Sell 13,070 9,219 15x EV/EBITDA on FY22 estimates
competition
Macro slowdown leading to cut in IT budgets, INR appreciation vs. USD,

Tata Consultancy Avg. 12-yr P/E plus 2 sd (25.9x) taken as GBP/EUR depreciation vs. USD, pricing pressure due to competition,
Buy 2,490 2,598
Services Ltd. Target multiple tightening of US visa regulation norms, major technology change
requiring re-training of large workforce.
Avg. 12-yr P/E plus 1std dev taken as
Target multiple (15.5x), as future earnings Delayed cyclical revival in Telecom capex globally, INR appreciation
Tech Mahindra Ltd. Buy * 791 954 growth potential looks strong given over USD, GBP/EUR depreciation against USD, pricing pressure due to
Telecom vertical growth and operational competition, tightening of US visa regulation norms.
margin improvement.
(1) Higher-than-expected US price erosion; (2) Execution on US
Aurobindo Pharma Buy 818 970 SOTP based on FY22E injectables/complex pipelines (3) USFDA manufacturing compliance
issues
Faster-than-expected penetration of specialty products, lower-than-
Sun Pharmaceutical expected specialty product marketing spend, better than expected
Sell 506 380 SOTP based on FY22E
Industries recovery of pressured derm business in the US, rebound in high-margin
India chronic business
(1) Concentration from top 5 APIs, (2) USFDA compliance issues, (3)
Divi’s Labs Buy * 3,186 3,600 SOTP based on FY22E
API market pricing, (4) rising localisation trends
Increased pricing competition, margin pressures from commodity price

Voltas Buy * 679 680 SOTP based on FY22E inflation, and supply-chain disruptions from an immediate ban on
imports.
PE: We value the company on 38x P/E Upside risks: Higher government incentives to the housing sector, New
multiple to FY25E to capture longer-term product additions
Havells India Neutral 671 560
growth, and discount it back three years to Downside risks: 1) failure to scale up meaningfully, and 2) high
derive our 12-m price target of Rs560 competition resulting in lower profitability
Downside risks: Aggressive bidding, longer-than-expected delay in

Larsen & Toubro Buy 910 1,140 SOTP based on FY22E
order inflow pick-up, higher interest rates for a sustained period
Bharat Heavy P/E: P/E based valuation with a 8x multiple Upside risks: Increased capex on emission norms; higher replacement
Sell 36 25
Electricals to FY22E of old plants
Downside risks: Delay in pick-up of trade activity; lower than expected

Adani Port and SEZ Buy 353 390 SOTP based on FY22E
coal imports
Gujarat Pipavav Port

Buy 83 90 SOTP based on FY22E Downside risk: Further market share loss to nearby ports.
Ltd.
Upside risks: Faster-than expected pick-up in domestic traffic; faster

Container Corp. of implementation of MMLPs, increased realization and market share
Neutral 389 430 SOTP based on FY22E
India Downside risks: Higher haulage charges by Indian railways, Lower
EXIM cargo transported through rail
* on Conviction List. Pricing as at 15 Sept 2020
Goldman Sachs India
Disclosure Appendix
Reg AC
We, Pulkit Patni, Shyam Srinivasan, CFA, Pramod Kumar, Sumeet Jain, Aditya Soman and Manish Adukia, CFA, hereby certify that all of the views
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We, Prachi Mishra and Jonathan Sequeira, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have
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Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
GS Factor Profile
The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its
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Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a
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percentile and (100% - Multiple percentile).

Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs
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For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative.
M&A Rank
Across our global coverage, we examine stocks using an M&A framework, considering both qualitative factors and quantitative factors (which may vary
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representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard
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Quantum
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Disclosures
The rating(s) for Adani Port and SEZ, Bharat Heavy Electricals, Container Corp. of India, Gujarat Pipavav Port Ltd.,
Havells India, Larsen & Toubro and Voltas is/are relative to the other companies in its/their coverage universe:
Adani Port and SEZ, Bharat Heavy Electricals, Blue Dart Express Ltd., Coal India Ltd., Container Corp. of India, Crompton Greaves Consumer Elec,
Cummins India, Gujarat Pipavav Port Ltd., Havells India, InterGlobe Aviation Ltd., Larsen & Toubro, NTPC Ltd., Power Grid, Spicejet Ltd., Tata Power,
Thermax, Voltas
The rating(s) for Bajaj Auto, Bosch Ltd., Mahindra & Mahindra, Maruti Suzuki India and TVS Motor is/are relative
to the other companies in its/their coverage universe:
Amara Raja Batteries Ltd., Ashok Leyland, Astra International, Bajaj Auto, Bosch Ltd., Eicher Motors, Exide Industries, Hero MotoCorp, Jardine Cycle &
Carriage, Mahindra & Mahindra, Maruti Suzuki India, Motherson Sumi Systems, PT United Tractors, TVS Motor, Tata Motors
The rating(s) for Tata Consultancy Services Ltd. and Tech Mahindra Ltd. is/are relative to the other companies in
its/their coverage universe:
HCL Technologies Ltd., Hexaware Technologies Ltd., Infosys Ltd., Infosys Ltd. (ADR), Larsen & Toubro Infotech Ltd., Mindtree Ltd., Mphasis, Tata
Consultancy Services Ltd., Tech Mahindra Ltd., Wipro Ltd., Wipro Ltd. (ADR)
The rating(s) for Aurobindo Pharma, Divi’s Labs and Sun Pharmaceutical Industries is/are relative to the other
companies in its/their coverage universe:
Aurobindo Pharma, Biocon Ltd., Cipla, Divi’s Labs, Dr. Reddy’s Laboratories, Glenmark Pharmaceuticals, Lupin, Sun Pharmaceutical Industries
The rating(s) for Aditya Birla Fashion and Retail and Page Industries Ltd. is/are relative to the other companies in
its/their coverage universe:
Aditya Birla Fashion and Retail, Asian Paints (India), Avenue Supermarts Ltd., Britannia Industries Ltd., Colgate Palmolive (India), Dabur India, Emami
Ltd., Godrej Consumer Products Ltd., Hindustan Unilever, ITC, Jubilant Foodworks, Marico, Nestle India, Page Industries Ltd., Titan Co., United
Breweries Ltd., United Spirits
Goldman Sachs India
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India - Make in India - Laying Out The Playing Field

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EQUITY RESEARCH | September 21, 2020 | 7:39 PM IST

PRODUCTION LINKED TAX

The Goldman Sachs Group, Inc.

PM Summary: Early steps towards self-reliance 7

What is “Atmanirbhar Bharat”? 12

Macroeconomic implications of “Atmanirbhar Bharat”: Execution remains the key 19

Industrial: Air conditioners and defence equipment to lead localisation 28

Pharma: API opportunity is large and seeing global tailwinds 53

TMT: Smartphone manufacturing to get incremental push 67

Logistics: A key enabler for Make in India 69

TP methodologies & risks 73

Unless otherwise stated, pricing is based on Sep 18th close.

Make in India: Sector snapshot

Sector Industrial Autos Pharma Defence IT Services TMT Consumer

Domestic and Export Current dependency

Progress made so far + ++ + + - ++ -

Source: Goldman Sachs Global Investment Research

PM Summary: Early steps towards self-reliance

(Buy) could beneﬁt from growth in domestic opportunities.

Industrials - Covered Companies

Beneficiary of Western Dedicated Freight Corridor project expected to

Beneficiary of Western Dedicated Freight Corridor project expected to

Air Conditioners / Electricals

Aggressive localization plan for non-electrical parts underway - has ~15%

Source: Datastream, Goldman Sachs Global Investment Research

Telecom, Media & Technology

What is “Atmanirbhar Bharat”?

The key objectives of the Make in India scheme are as follows:

n An increase in domestic value addition and technology in manufacturing;

Exhibit 5: Make in India focus sectors

Source: Data compiled by Goldman Sachs Global Investment Research

25,000 18.5% 14%

Source: MOSPI Source: MOSPI

Merchandise Exports ($bn) Merchandise Imports ($bn) Deficit ($bn)

Source: World Bank Source: DGCI

Cohorts Working Income Working Income Working Income

Source: Data compiled by Goldman Sachs Global Investment Research

Movers & Shakers

Urban white collar

Educated urban mass

Urban blue collar

-0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4%

Growth in salaried people tax filing (CAGR FY13-18)

n Growth and Orientation; and

Niti Aayog Country-Level Analysis of Export Preparedness

Trade Support 16.9

Business environment 44.6

Source: NITI Aaayog Export Preparedness Index 2020

Niti Aayog Export Preparedness Index 2020

Source: NITI Aayog Export Preparedness Index 2020

Exhibit 16: State-wise average number of export destinations

Source: DGCIS, NITI Aayog

Macroeconomic implications of “Atmanirbhar Bharat”: Execution remains

30 Median Corporate Tax Rate 30

Source: World Bank, Goldman Sachs Global Investment Research

In an earlier report we provided an overview of the academic research literature on the

2. Production Linked Incentive (PLI) schemes

3. Higher tariffs and embargo on imports of some goods

Exhibit 19: Government plans to raise tariffs on 370 products

Source: Bloomberg Quint, news reports, Trademap

n Actual implementation of these tariffs.

4. Firm relocation and supply chain shifts

Deviations in US imports from Vietnam