Unnati - FMCG, Consumer Durable, Retail, Brewery - 2018

UNNATI INVESTMENT MANAGEMENT AND RESEARCH GROUP
UNNATI
SECTOR FMCG, CONSUMER DURABLES, RETAIL AND
REPORT BREWERIES
2018-19
Khushi Desai | Arihant Jain

FMCG, Durables, Retail & Breweries
TABLE OF CONTENTS
Economic Outlook ........................................................................................................................................ 4
FMCG ............................................................................................................................................................ 8
Introduction .............................................................................................................................................. 8
Market Overview .................................................................................................................................... 10
Vertical Analysis ...................................................................................................................................... 11
Food and Beverages......................................................................................................................... 11
Healthcare........................................................................................................................................ 12
Home and Personal Care ................................................................................................................. 14
Industry Analysis ..................................................................................................................................... 15
Porter’s Five Forces Analysis............................................................................................................ 15
PEST Analysis ................................................................................................................................... 16
SWOT Analysis ................................................................................................................................. 17
Porter’s Value Chain ....................................................................................................................... 18
FMCG Distribution Network ................................................................................................................... 19
Consumer Lifestyle Trends...................................................................................................................... 20
Growth Drivers ........................................................................................................................................ 23
Growth opportunities. ............................................................................................................................ 24
Strategies Adopted by FMCG Companies. .............................................................................................. 26
Major Firms Overview............................................................................................................................. 28
Key M&A Deals........................................................................................................................................ 28
Challenges Faced by FMCG Sector. ......................................................................................................... 29
Impact of Union Budget 2018. ................................................................................................................ 30
Key Government Policies. ....................................................................................................................... 31
Impact of GST. ......................................................................................................................................... 32
Company Overview: ITC Limited. ............................................................................................................ 33
Consumer Durable Goods .......................................................................................................................... 39
Introduction ............................................................................................................................................ 39
Production of Consumer Durable Goods ............................................................................................... 40
Porter’s Five Force Analysis .................................................................................................................... 42
Evolution of Consumer Goods in India ................................................................................................... 43
Unnati Sector Report 2018-19 | 1

Consumer Durables Market Overview.................................................................................................... 44

SWOT Analysis......................................................................................................................................... 45
Key Products ........................................................................................................................................... 46
Notable Trends........................................................................................................................................ 48
Strategies Adopted by CD Companies in India. ...................................................................................... 49
Opportunities and Growth Drivers ......................................................................................................... 50
Government Policies and Regulations. ................................................................................................... 55
Financial Performance. ........................................................................................................................... 56
Benefits of FDI to CD Sector .................................................................................................................... 57
Challenges to the Industry. ..................................................................................................................... 58
Company Overview: Whirlpool ............................................................................................................... 59
Retail ....................................................................................................................................................... 63
Introduction ............................................................................................................................................ 63
Industry Overview ................................................................................................................................... 67
Organised Retail Penetration .................................................................................................................. 69
Value Chain ............................................................................................................................................. 73
Porter’s Five Forces ................................................................................................................................. 74
Advantage to Retailers in India ............................................................................................................... 75
Growth Drivers for Retail in India............................................................................................................ 76
Growth Value Proposition....................................................................................................................... 76
Growth Opportunities in Indian Retail Investment ................................................................................ 77
Strategies Adopted by Retail Companies in India. .................................................................................. 78
Government Policies and Regulation...................................................................................................... 81
Challenges to Retail Growth in India....................................................................................................... 85
E-tail in India ........................................................................................................................................... 87
Advantage to e-commerce companies in India ...................................................................................... 90
Draft e-commerce policy. ....................................................................................................................... 91
Strategies adopted by E-commerce companies in India. ....................................................................... 92
E-tail Value Chain. ................................................................................................................................... 94
Stocking Model. ...................................................................................................................................... 94
Company Overview: Future Retail Limited ............................................................................................. 95

Gems and Jewellery ................................................................................................................................... 99

Introduction ............................................................................................................................................ 99
Value Chain ............................................................................................................................................. 99
Domestic Market .................................................................................................................................. 100
Exports and Imports of Gems and Jewellery ........................................................................................ 100
Exports of Cut and Polished Diamonds ................................................................................................. 102
Exports and imports of Gold Jewellery. ................................................................................................ 102
Diamond Processing.............................................................................................................................. 103
Gold Processing. .................................................................................................................................... 103
Market Analysis..................................................................................................................................... 104
Regulatory Bodies ................................................................................................................................. 106
Growth Drivers. ..................................................................................................................................... 107
Threats. ................................................................................................................................................. 108
Government Schemes and Regulatory Framework .............................................................................. 108
Notable Trends...................................................................................................................................... 112
Company Overview: Rajesh Exports. .................................................................................................... 116
Breweries. ................................................................................................................................................. 120
Introduction. ......................................................................................................................................... 120
Market Overview .................................................................................................................................. 122
State Wise Consumption and Regulation. ............................................................................................ 126
Drivers of Growth.................................................................................................................................. 128
Challenges for the Breweries Sector. .................................................................................................... 129
Impact of GST. ...................................................................................................................................... 130
IMFL....................................................................................................................................................... 132
Beer. ...................................................................................................................................................... 133
Wine. ..................................................................................................................................................... 134
Company Overview: United Spirits. ...................................................................................................... 135

Economic Outlook
The year 2017 was marked by a number of key structural initiatives to build strength
across macro-economic parameters for sustainable growth in the future. The growth in the
first half of the year suffered despite global tailwinds. However, the weakness seen at the
beginning of 2017, seems to have bottomed out as 2018 set in. Currently, the economy
seems to be on the path to recovery, with indicators of industrial production, stock market
index, auto sales and exports having shown some uptick (shown below). We believe that
India’s economic outlook remains promising for FY17-18 and is expected to strengthen
further in FY18-19. However, the signs of green shoots should not be taken for granted as
downside risks remain.
The biggest challenges for 2018 are as to how the economy can maintain its recovery in the
face of increasing inflationary pressures, coupled with a higher fiscal deficit as well as an
increasing debt burden. The key to this conundrum lies in the revival of consumer demand
and private investment. Over the last few quarters, what has become increasingly evident
is the divergence between Indian and global growth. This decoupling largely happened as
India’s growth was hit on account of mega policy announcements. One of the other reasons
for this can possibly be attributed to shifting real interest rate trends. During 2016, India’s
real interest rates followed a downward global trend. However after this the rates started
shifting upwards which affected investment activity, led to currency appreciation and
resulted in subdued export activity.

Recent GDP Trends

The recent data on GDP growth in Q3 of FY 2017-18 has again revived expectations that the
deceleration in the economic activity because of GST and demonetization may have
bottomed out. Some of this good news is also mirrored in the data on corporate earnings as
well. Even with the slowdown in 2017, recent data suggests that the GDP has grown by an
average of 6.4% in the first three quarters of FY17-18.
As can be seen from the above, the services sector continued to show a stable rate of
growth. The agriculture sector suffered from a price crash following over-production
during the kharif season, while erratic monsoon during the latter part of the year led to
some crop destruction resulted in falling farm incomes. Looking ahead, the agriculture
segment is expected to grow higher than the estimated 2.1% in the current fiscal possibly
following positive prospects on Rabi harvest.
Demand side analysis

A detailed look at the expenditure side suggests that the demand behaviour has seen some
improvement. However there remains some discrepancy in private consumption and
consumer durables data. While private consumption grew at an average of 6.3% in the first
three quarters of 2017-18, consumer durables have contracted through most part of the
year. Importantly, it has largely been the increases in private consumption and government
spending that has stimulated growth. However, the recently released Q3 data which
showed an unexpected jump in investment has revived hopes that private investment
sentiment may also turn positive.

Fiscal Consolidation
India’s fiscal deficit has steadily declined over the years. However, the path to reach the
target of 3% has been extended. If we analyse the revenue trends, then, it can be seen that
the gross tax to GDP ratio is likely to have risen by 0.2% to 11.6% in FY17-18 and tax
revenues are expected to grow by 16.6% in FY19 as compared to 15.3% in FY18. Between
Apr-Dec 2017, close to 80% of the total receipts of the government were generated from
tax revenues.
The total tax income of INR 9 trillion in the first 9 months of FY17-18 represented a growth
of close to 25%. Here, direct tax revenue grew by 19.4% in the first 9 months compared to
a rise of 13.8% in FY16-17, while indirect tax revenues grew only by 18.6%, against a
sharper 24.8% rise in FY16-17. The upswing in direct tax revenue, if sustained, could signal
a rising tax base of the economy.
Non-tax revenues recorded a decline of 12% between Apr-Dec 2017-18 over the last year
as compared to a growth of 9% in FY16-17 with total collections of only INR 1.1 trillion.
The government has budgeted for INR 4.4 trillion in FY18 factoring in an average monthly
inflow of INR 400 billion.
Inflation
One of the major positives over the past few years has been the declining inflation levels.
Consumer price inflation has in fact, fallen to multi year lows during the last fiscal. This has
been possible on account of falling or stable global commodity prices and better
management of supply shortages in the agrarian economy. That said, inflation pressures
did reverse during the latter part of 2017 as crude oil prices have started moving up and
favourable base effects have waned. During this period, some increase in food prices along
with one-time modifications on account of pay revisions in the public sector and housing
rent allowance being revised upwards have also led to rising inflation.
Trade and Investment

The external sector has remained rather muted despite the global economy performing
well. Indian exports grew only by 11.2% between Apr-Jan 2017-18. The highest growth has
been seen in sectors such as gems and jewellery, mineral fuels, machinery,
pharmaceuticals, organic chemicals, electrical machinery textiles among others.
In contrast, total imports showed considerable strength over the better part of the year,
growing at a double digit pace – maintaining an average of 23% from Apr-Dec 2017 as
compared to an increase of merely 1.9% in FY16-17. While, the uptick in imports in part
suggests resilience of domestic demand as they largely started seeing an upswing around
the time of demonetization.
Overall trade deficit has risen close to $117 billion between Apr-Dec 2017 as compared to
$78 billion in the same period last year. Despite a continuous rise in trade deficit, it is
expected to remain under control over the coming period as exports mark a rise on the
back of upswing in external demand and diminishing impact of disruptions.
Conclusion
While the last year saw a number of changes to the system, the impact of these have largely
waned as new equilibrium has started to set in. The Indian economy has once again
regained the tag of the “fastest growing economy”. How sustainable this momentum will be,
will depend on how effectively the various policies, especially with respect to structural
and infrastructure related reforms are implemented.

FMCG
Fast-moving consumer goods (FMCG) can be defined as packaged goods that are
consumed or sold at regular or small intervals. They are sold quickly and at relatively lower
cost. Therefore, the profits earned are more dependent upon the volume sales of the
products. The most common in the list are toilet soaps, shampoos, toothpaste, packaged
foodstuff, and household accessories. These items are meant for frequent consumption and
have a high return.
The FMCG sector is more lucrative because of low penetration levels, well-established
distribution networks, low operating cost, lower per capita consumption, large consumer
base and simple manufacturing processes for most products resulting in fairly low capital
investments. As investments, FMCG stocks are generally low-growth, but safe bets with
predictable margins, stable returns and regular dividends.
The Indian FMCG sector is the fourth largest sector in the economy, and has grown
annually at about 12% over the last decade. It is expected to grow at a CAGR of 27.86% and
is expected to reach USD 103.7 billion by 2020 from USD 52.75 billion in 2017-18. It is
forecasted to report revenue growth of ~11-12% in FY19 from ~8% in FY18. The total
consumption expenditure is set to increase at a CAGR of 22.57% from 2016-2021.
Future growth of FMCG sector in India is mainly dependent upon multiple market drivers
such as rising disposable incomes, growing urbanisation, digitally influenced spending,
government reforms, and the growing rural market.
Trends in FMCG revenues over the years

120
103.7
100
83.3
80
68.4
60 52.75
49
43.1
35.7 38.8
40 31.6 33.57
20
0
2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F
Source: IBEF

Projections
70 (%) 35 (%) 95 (million)

240 (US$/billion)
Projected growth in Proportion of Indians Number of youth
size of India’s FMCG
India’s urban household living in urban areas by expected to join India’s
industry by 2025
income by 2025 2020 (32% in 2015) workforce by 2025
22 (million) 150-200 (million) 1.7 (x) 180 (US$ 180 billion)

Addition to India’s FMCG consumers increase in India’s Size of modern trade by
affluent households by expected to be digitally average household 2020m from US$60
2025 influenced by 2020 incomes by 2025 billion in 2015
Source: Luxurydaily, Livemint, BCG, Business standard
The rise in rural consumption is expected to drive the FMCG market. In FY18, it rose
by 9.7%, outpacing the 8.6% growth in urban spending.
In 2017, the urban area was the largest contributor to the overall revenue generated by the
FMCG sector in India with about 55% share while the rest came from semi-urban and rural
areas.
While consumer goods are largely retailed through two primary sales channels - general
trade and modern trade, present times are quite interesting as new channels such as e-
commerce have emerged quickly to
become forces to reckon with; but
Urban - Rural industry Breakup
this space is yet to provide a
profitable and sustainable model as
FY18
things stand today. General trade
comprising of the ubiquitous kirana
stores is the largest sales channel
forming the majority of overall retail
sales. However, growth of consumer
goods retailed through the newer
channels is now outpacing the
growth of FMCG products in general
trade. Tier II and Tier III are
witnessing a fast growth in the Urban Rural
modern trade segment.
Source: IBEF

Market Overview
FMCG
Household &
Food & Beverages Health Care
Personal Care
It accounts for 19% of the It accounts for 31% of the It accounts for 50% of the
sector sector sector
 Dairy Products  OTC products and  Soaps & Detergents

 Tea/Coffee ethicals  Tooth Powder
 Sugar  Hair Shampoo
 Vegetable Oils  Toothpaste
 Bakery Products  Hair Oil
 Confectionary  Creams & Lotions
 Processed Foods  Agarbattis, fragrances
 Branded flour etc. & essential oils, etc.
The fastest growing subcategories are packaged food, edible oils and selected segments of
home and personal care (e.g. skin care). The market penetration is as follows -
MARKET PENETRATION (IN %)

100
14 10 18
24
80
66
60 78
92 87
86 90 Unbranded
40 76 82
Branded
20 34
22
8 13
0
Pulses & Edible Oils Dairy Packaged Beverages Consumer Home and Total
Cereals &fats food Health Personal
Care
Source: Joint report by CII and Boston Consulting Group
jff
Vertical Analysis
Food & Beverages
The F&B industry is the fifth-largest sector in manufacturing. Between April 2000 and June
2017, the Indian food-processing sector received FDI worth USD 7.81 billion, making it the
13th largest sector receiving FDI in the country. In fact, 80% of the FDI in the food-
processing sector was received in the period since April 2012. Thanks to the entry of
multinational companies and their expansion in the market, India is rapidly becoming a
production hub for processed foods, which are increasingly being consumed in India as
well as exported to countries in South Asia, the Middle East and Africa.
Within the domestic F&B industry, ten segments have especially gained increasing
acceptability among the Indian consumers and all have recorded a high growth rate.
Segment Categories Some key players in India
Breakfast Cereals Hot and cold cereals Kellogg, PepsiCo, GSK CH, Marico
Traditional Snacks, Meat Snacks, Nuts
Pepsico, ITC, Haldiram, Parle,
Savory Snacks and Seeds, Popcorn, Potato Chips,
Bikanerwala
Processed Snacks
Ingredients Seasonings, Dressings, Sauces Everest, MDH, Heinz, Nestle, HUL
Mars International, Royal Canin India,
Pet Food Dog Food, Cat Food, and other
Indian Broiler Group
Naturally Healthy 100% Fruit Juice, Natural Mineral Dabur, PepsiCo, Tata Global Beverages,
Beverages Water, Green Tea HUL
Ambient ready meals and dried ready

Ready Meals Nestle, MTR, ITC, Gits Foods
meals, chilled and frozen ready meals
Chocolate, Gum and Sugar Mondelez, Mars International, Parle

Confectionary
Confectionary Products, Ferrero
Sresta Natural Bio Products, Mehrotra
Organic Food Organic Packaged Foods and Beverages Consumer Products, Sanjeevani
Organics
Milk, Butter, Cheese, Yogurt, Dairy-

Dairy Food Amul, Mother Dairy, Danone
based and soy-based desserts
Breads and rolls, Cakes, Biscuits, Britannia, Parle Agro, ITC, Monginis
Bakery
Pastries and Pies Foods

As per a report from MOFPI, EY and CII on ‘High Growth Segments of Indian Food and
Beverage Industry’, apart from India’s strong macro-indicators and production base, there
are seven factors that have led to an increase in the consumption in India of these high
growth F&B segments.
1. Affluence of working population with increase in disposable income

2. Rising urbanisation leading to changing lifestyles and less time to prepare food at
home
3. Changes in taste and preference of the Indian consumers
4. Increase in tourism in India and international travel by Indians for example,
increase in the use of ready-to-eat meals during travel
5. Innovative advertisements, rise in supermarkets and ecommerce boom creating
increasing awareness among consumers and also making the products easily
accessible to the consumers
6. Promised quality standards, health benefits of the products
7. Increase in consumption of fast growing F&B segments during special occasions and
celebrations.
Complementing the strong demand drivers, India offers the largest diversified production
base in the food sector. For example, it is the largest producer of milk in the world, the
second largest producer of fruits, vegetables and wheat, and the third largest of eggs, sixth
in meat production and is a leading producer of spices, fish and plantation crops (according
to Food and Agriculture Organisation of the United Nations). This is advantageous to the
Indian F&B industry to source its raw materials.
Healthcare
India’s OTC drugs market was worth USD 6.29 billion in 2016 and is estimated to be
growing at a CAGR of 14.6% to reach USD 12.4 billion by 2021. The market is expected to
grow annually by 1.8%. Rapid urbanization, highly stressful lives and long working hours
have all led to a growing number of urban Indians developing increasingly irregular daily
schedules. Hence, the frequency of certain ailments is on the rise in India. At the same time,
consumers are becoming more inclined to battle their ailments themselves, seeking over-
the-counter (OTC) remedies and medicines rather than checking in with their doctors and
caregivers.
Increasing awareness about the cost-effectiveness of self-medication and OTC medicines is

a crucial factor fuelling market growth. However, doctor’s willingness to prescribe OTC and
prohibition of advertising for common ailments are the major restraints hindering the
growth market.

Market Market Current Key

Drivers Restraints Opportunities Challenges
• Shift in Consumr • Drug Abuse • Companies • Trade-Offs for
Attitude towards • Restriction in willing to shift to lower cost
Self-Medication advertising OTC generic
• Rise in geriatric • Therapeutic • Widespread use prescription
population errors of media venue drugs
• Rapid shift from • Restrictions choices to boost • Continued
RX to OTC against OTC awareness openness
• Affordability of antibiotics usage towards private-
OTC drugs label alternatives
Source: Business Wire
jff
Among the emerging countries, India is expected to be among the top 10 OTC markets in
the near future. Government initiatives such as the "Make in India" program will increase
the number of manufacturing facilities throughout India and will increase the export of
OTC drugs to developed countries such as the US, Japan, and Germany.
The over-the-counter (OTC) market is growing at a faster rate in emerging countries such
as China, South Africa, India, Vietnam, and Indonesia as compared to developed countries
fueled by favorable demographic trends, higher out-of-pocket expenditure, and growing
focus of multi-national companies (MNCs) to expand their business in these markets.

Home & Personal Care
The beauty and personal care market in India is estimated to be worth USD 17.1 billion in
2018. Personal hygiene products such as bath and shower products, deodorants, hair care,
skin care, colour cosmetics and fragrances are the key segments of the personal care
market. Each of these segments exhibit their unique trends and growth patterns.
The recent years have seen a marked increase in beauty and grooming needs among the
Indian population. The affluent and middle class population in India today do not consider
beauty and wellness as a luxury, but a necessity and there is an increased emphasis on
looking good and young at all times.
With consumers across the world and India in particular, going Green, the demand for
Natural and Ayurvedic beauty care products is also rising. Natural remedies are fast finding
acceptance, particularly among the new generation of upwardly mobile Indians. Given the
fact that Indians have been traditionally inclined towards natural products and home
remedies for their daily beauty care needs, and the growing awareness about the side
effects of using chemical-laden products, consumers are increasingly seeking Natural and
Ayurvedic personal care products. Home & Personal Care contributes approx. 22% of
revenue of FMCG companies.
Trends that are shaping the Indian Beauty and Personal Care Market –
1. Shift towards mental and physical well-being through use of natural, organic, anti-
fatigue, antipollution, anti-ageing products.
2. Increased adoption of men’s grooming products.
3. Increasing use of beauty devices and technology infused products and services.
4. Consumers opting for at-home services, online buying.
5. Heightened sense of individualism in purchase and choice among Millennials.
6. Interest and willingness to trade-up, increased use, bigger repertoire of products.
7. Growing importance of peer feedback and product reviews in purchase decisions.
The household care segment mostly includes fabric wash and household cleaners. This
segment is a volume driven market with low margins and is marked with stiff competition.
This segment recorded robust growth in the past five years due to focused innovation in
the product portfolio to provide greater consumer value. The increasing household budgets
have allowed for new categories of household care products to enter the Indian market.
Although majority of household care products sales are generated through local
independent small grocers and modern grocery retailers, Internet retailing has emerged as
a potential channel for the growth of household care segment in cities.

Industry Analysis
Porter’s Five Forces Analysis of Indian FMCG Industry
Threat of Substitutes
 HIGH – Presence of multiple

brands
 Narrow product
differentiation under many
brands
 Price War
Supplier Power Competitive Rivalry Buyer Power
 HIGH – Private label brands  HIGH – Low switching cost

 LOW – Big FMCG companies
by retailers are priced at a induces the customer’s
are able to dictate the
discount to mainframe product shift
prices through local
brands limits competition  Influence of marketing
sourcing from a fragmented
for the weak brands strategies
group of key commodity
 Highly fragmented industry  Availability of same or
suppliers
as more MNCs are entering similar alternatives
Threat of New Entrants
 MEDIUM – Huge
investments in setting up
distribution network and
promoting brands
 Spending on advertisements
is aggressive
Source: IBEF

PEST Analysis of Indian FMCG Industry

Political Factors
 Tax exemption in sales and excise duty for small scale industries
 Focus on transportation and infrastructure development that helps in
improving distribution network
 Direct support to agricultural sector
Economic Factors
 The GDP rate of Indian economy is comparatively good and is likely to advance
further in coming years.
 Inflation rate is increasing across the globe and India is also no exception, but
the government & RBI both are trying to control the inflation rate with the help
of different measures.
 The per capita income is increasing so the customers are having more income
to spend for various reasons
Social Factors
 The Indian culture, social & lifestyle are changing significantly. The rich and
upper middle class consumers are up trading to premium and have become
more brand conscious.
 Rapidly evolving consumer or preferences has created a large market
opportunity for FMCG players.
Technological Factors
 Indian FMCG industry has evolved gradually over a period of time both in terms
of new technology adoption & efficient processes benchmarked to international
standards.
 Many large FMCG companies are using innovative technology marketing
services and creating digital presence for their brands using various platforms
and ROI-driven digital campaigns.

SWOT Analysis of Indian FMCG Industry
STRENGTHS WEAKNESSES
1. Low operational Costs 1. Low scope for investing in
2. Presence of established technologies and achieving
distribution networks in both economies of scale, especially in
urban and rural areas small sectors
3. Presence of well-known FMCG 2. High abundance of 'Me-too'
brands products
4. Deep roots in local culture & 3. High Marketing costs
great understanding of consumer
needs
OPPORTUNITIES THREATS
1. Untapped rural market, 1. Increased competition with the
changing life-styles entry of MNCs
2. Rising income levels, i.e. 2. Cyclical rural demand
increase in purchasing power of depending on monsoon to a large
consumers extent
3. Large domestic market with 3. Macroeconomic factors like
median age of 27 currency depreciation, which
4. High export potential increases the price of imports like
raw material, crude oil.

Porter’s Value Chain of FMCG Industry
Administrative, Legal, accounting, financial management

Finance infrastructure
Support Activities
Human Resources Personnel, by recruitment, training, staff planning etc.

Management
Product and Product and process design, production
Value Added less Cost = Profit Margin

Technology development Engineering, market testing, R&D
Procurement Supplier management, funding, sub-contracting,

specification
INBOUND OPERATION OUTBOUND SALES & SERVICING

LOGISTICS LOGISTICS MARKETING
Examples: Examples:
Examples: Manufacturing, Examples: Examples: Warranty,
Primary Activities
Quality Packaging, Finishing Customer Maintenance,

Control, Production goods, Order Management, Education and
Receiving, control, Quality handling, Order Taking, training,
Raw material Control, Dispatch, Promotion, Upgrades
control, Supply Maintenance Delivery, Sales Analysis,
schedules Invoicing Market
Research

FMCG distribution Network

The typical chain for a grocery store FMCG product will be -
FACTORY
WAREHOUSE/C&F
SUPER STOCKIST STOCKIST CO. OP STORES
RURAL STOCKIST
WHOLE RETAILER WHOLESALER RETAILER

SALER
CONSUMER

Consumer Lifestyle Trends

Consumer behaviours and spending patterns are shifting as incomes rise and Indian
society evolves. These shifts have big implications for how companies position
themselves.
Companies today need to focus on three aspects of India’s fast-growing consumer market:
rising affluence, the country’s continuing and unique pattern of urbanisation, and
fundamental shifts in family structures.
Rising Affluence
In terms of spending, the two top consumer categories—elite and affluent—will become
the largest combined segment by 2025, accounting for 40% of consumption compared with
27% in 2016. Within this segment, the urban elite and affluent are fuelling most of the
growth. By 2025, wealthy urbanites will be responsible for one-third of total consumption.
The share of the next billion and strugglers will shrink from 49% in 2016 to 36% in 2025.
Continuing Urbanization
About 40% of India’s population will be living in urban areas by 2025, and these city
dwellers will account for more than 60% of consumption. Much of this growth will take
place in small towns. Consumers in emerging cities behave differently from the big-city
consumers. They have a strong value-for-money orientation, significant local cultural

affinity, and a more conservative financial outlook. They have high purchasing aspirations
but are often constrained by product availability.
Shifting Family Structures

The extended Indian joint family has given way to nuclear households, which we define as a
couple or a single person, with or without children. The proportion of nuclear households,
which has been on the rise during the past two decades, has reached 70% and is projected
to increase to 74% by 2025. This ongoing shift is significant to marketers because nuclear
families spend 20% to 30% more per capita than joint families.
Decision makers in nuclear households—younger and more optimistic than those in joint
families—base their consumption decisions more on lifestyle considerations and the need
to “keep pace” than on the need for functional necessities, especially in such categories as
consumer durables and apparel.
Spending Patterns Evolve

Rising incomes affect spending patterns in various categories differently. Certain categories
(and subcategories) become more or less relevant to consumers as their incomes increase.
Shifting Growth Drivers

Traditionally, for many consumer categories, increasing market penetration has been the
biggest driver of sales growth. However, this is set to change as frequency of purchase and
spending per purchase occasion rise in importance. There is a shift toward higher quality,
higher-price sub segments within categories, as Indian consumers trade up with greater
frequency and enthusiasm. As per BCG’s report ‘The Changing Connected Consumer in
India’, 30% of consumers in India are willing to spend more on products that they perceive
are “better”—a much higher percentage than is found in more developed markets such as
the US, Germany, and the UK.
The impact of penetration, frequency, and spending per purchase varies across categories.
For example, in women’s apparel, elite and affluent consumers spend nine times and five
times more, respectively, than a struggler. The difference is mostly a matter of higher
spending per purchase; differences in product penetration and purchase frequency are not
significant. For example, elite and affluent householders spend 35 times and 13 times more,
respectively, than strugglers in this category. All three factors - increase in penetration,
frequency of occasion, and spending per purchase contribute to this shift.

Growth in Online Spending

As per an ASSOCHAM-Resurgent joint study, the number of online shoppers will rise to
over 120 million this year. Continued growth in internet penetration and rising e-
commerce adoption will drive further growth in the number of online buyers. Multiple
factors are behind the rising adoption of e-commerce channels. These include the strong
value proposition offered by online merchants, proliferating payment platforms,
strengthening delivery logistics, and significant financial investment in the sector.
From the consumer’s perspective, convenience will remain the primary factor driving this
growth. As per the BCG report mentioned above, almost 60% of online shoppers rate
convenience as a key reason to shop online, and the value of convenience keeps rising as
consumers increase their online shopping. Discounts are another popular feature for more
than half of online shoppers (especially lighter online shoppers), and availability and
assortment of merchandise are important to more than one-third. Trust in showrooms
remains the biggest barrier (after basic access) to shopping online, followed by difficulty in
website navigation and fear of fake products.
Share of consumption of affluent / elite households to double to ~50%

120
100
16
26
8 32
80
19 13
60 16
22
40 32 25
28
20
20
26
12 7
0
2010 2015 2020
Struggler (<1.5 lac) Next Billion Aspirers (5 to 10 lac)
Affluent (10 to 20 lac) Elite (> 20 lac)

Growth drivers for India’s FMCG sector
SHIFT TO ORGANISED MARKET

 Organised sector growth is expected to grow as the share of unorganised market
in the FMCG sector fall with increased level of brand consciousness
 Growth in modern retail will augment the growth of organised FMCG sector
INCREASE IN PENETRATION
 Low penetration levels of branded products in categories like instant foods
indicating a scope for volume growth
 Investment in this sector attracts investors as the FMCG products have demand
throughout the year.
RURAL CONSUMPTION
 Rural consumption has increased, led by a combination of increasing incomes
and higher aspiration levels, there is an increased demand for branded products
in rural India
 Huge untapped rural market
 As urban markets start getting saturated, many companies are shifting their
focus on the rural market to increase the penetration of their brands
EASY ACCESS
 Availability of products has become way more easier as internet and different
channels of sales has made the accessibility of desired product to customers
more convenient at required time and place
 Online grocery stores and online retail stores like Grofers, Flipkart, Amazon
making the FMCG product s more readily available.

Growth opportunities in the FMCG sector

Consolidation
 Indian FMCG companies can consolidate their existing business portfolios which is
leading to divestments, mergers and acquisitions
Product Innovation
 Indian consumers are highly adaptable to new and innovative products. For example,
Quaker Oats launched a mango flavoured drink ‘Quaker Oats + Milk’, marking PepsiCo’s
entry into the dairy drink space in India.
Premiumization
 With the rise in disposable incomes, mid and high-income consumers in urban areas
have shifted their purchase trend from essential to premium products
 Premium brands are manufacturing smaller packs of premium products. Example: Dove
soap is available in 50g packaging
 Nestle is looking to expand its portfolio in premium durables cereals, pet care, coffee,
and skin health accessing the potential in India.
Expanding horizons
 Companies can explore the business potential of overseas markets and several regional
markets.
Focus on rural market

 Leading players of consumer products have a strong distribution network in rural
India; they also stand to gain from the contribution of technological advances like
internet and e-commerce to better logistics. Godrej is focusing on rural market for
household insecticides segment. At present, Godrej accounts for 25% of the household
insecticides sales from rural areas
Third-party manufacturing
 This approach can help FMCG companies focus on front-end marketing. Reservation of
several items for SSI as well as additional tax incentives is set to provide an additional
impetus to the rise in this trend.

Sourcing Base
 Indian and multinational FMCG players can leverage India as a strategic sourcing hub
for cost-competitive product development and manufacturing to cater to international
markets
Low Penetration
 Low penetration levels offer room for growth across consumption categories
 Major players are focusing on rural markets to increase their penetration in those areas
Increasing private label penetration

 With the rise of retail players, private label has become popular in the FMCG space.
Private Label goods are considered substitutes of premium branded goods.
Preference for Ayurvedic, herbal and natural products

 Continuing with the disrupting trend that Baba Ramdev’s Patanjali brought forth,
companies are increasingly moving to such products, in response to changing consumer
trends. For example, HUL launched Lever Ayush to directly compete with Patanjali’s
products.
Online FMCG
 As per the BCG, it is estimated that 40% of all FMCG purchases in India will be online by
2020, thereby making it a USD 5-6 billion business opportunity.

Strategies Adopted by FMCG Companies
PROMOTIONS AND OFFERS

 Many players offer combo deals, for e.g., in case of soaps and cosmetics, four soap
bars are offered in the price of three (helps in increasing sales while generating
profits), selling cosmetics, shampoo and conditioners as a combo pack at a
discounted price.
RESEARCH ONLINE PURCHASE OFFLINE (ROPO)
 The internet assists consumers to carry out their own research on the kinds of
products they want to purchase and the available choice of brands for the
particular product
 1 in 3 FMCG shoppers goes online before going to the stores
PRODUCT INNOVATION
 With a wide range of choice, Indian consumers have become selective when it
comes to loyalty to a brand
 Therefore, many prominent players are improving their game with bringing
innovative products in the market.
CUSTOMISATION
 Introduction of various types of same product for different user groups, for e.g.,
Calcium Sandoz and Calcium Sandoz for women, Horlicks for older women and
Junior Horlicks
 Introduction of various combinations of products at different price points so as to
cover as many market segments as possible

GREEN INITIATIVES TO LOWER COSTS
 FMCG companies are looking to invest in energy efficient plants to benefit the
society and lower costs in the long term.
 HUL fulfils 80% of its power requirement for its Sumerpur plant from solar
energy. The company has been able to reduce the carbon footprint of its
manufacturing plants by 13 per cent in FY17
JOINT VENTURE
 In January 2018, Eveready Industries India entered into a JV with the Wings
Group, an Indonesian large conglomerate and one of the major FMCG companies,
Universal Wellbeing. Through this JV, Eveready has plans to market and
distribute a large basket of FMCG products in India
ANALYTICS
 HUL implemented a transformational programme called Connected 4 Growth

(C4G) to help drive business growth by increased speed to market, faster
decision making, localised and swifter innovation.
 Patanjali uses Oracle and SAP for Enterprise Resource Planning (ERP), they will
further standardise the application on SAP. It plans to use machine learning for
quality control and product enhancement. They are also in talks with Net App for
big data solution.
PRODUCT EXPANSION
 In January 2018, Nestle, Switzerland based FMCG major, has entered into India’s
pet care segment by introducing arrange of premium dog food called ‘Purina
Supercoat’ under its subsidiary Nestle Purina.

Major Firms Overview
Key M&A deals in the FMCG Industry
Target Name Acquirer Name Year
Brillare Science Emami Ltd. 2018

Future Capital
Future Consumer Limited 2017
Investment Pvt. Ltd.
D&A Cosmetics Proprietary Ltd and Atlanta Body &
Dabur India 2017
Health Products Propriety Ltd
Helios Lifestyle Pvt Ltd Emami Ltd. 2017
Godfrey Philips India (packaged tea brands) Goodricke Group Ltd. 2017
HyperCity Future Retail 2017

Challenges Faced by FMCG Sector

Infrastructure: Infrastructure is one of the most important components of the FMCG
sector. An efficient FMCG operation hinges critically on high-quality supporting
infrastructure that includes a good national highway network, interstate roads and
congestion free city roads. Marketing, selling and distribution activities for consumer goods
products require transportation facilities. Besides, due to poor transportation facilities,
farmers and marketers find it difficult to reach markets. 30% of villages with a 250-plus
population are yet to benefit from the Pradhan Mantri Gram Sadak Yojana (PMGSY) in India
despite the Centre’s push to its rural development schemes and the World Bank’s decision
to pump in USD 500 million (`3,250 crore) for the Yojana..
Warehousing: In the rural areas, there are no proper facilities for public as well as private
warehousing. Many times dealers and retailers face problem of storage of goods. Further,
Indian warehousing players face challenges and bottlenecks at various stages of their
operation lifecycle. Some of these challenges are strategic while others are operational and
need to be managed on an ongoing basis.
Counterfeit products: Counterfeit products, which are the fake replicas of the real
product, are another issue for the FMCG sector. Taking advantage of the lack of literacy and
consumer knowledge, several small manufacturers churn out spurious products that they
label similar to the big brands, Lifeboy or Lax soap or Fivestar chocolate bars, Vicky balm,
for instance. These spurious pass off products affect large, high quality companies that have
actually invested money in research and development to create their products and build
brand equity.
Low per capita income in rural areas: The per capital income in rural areas is too low
compared to urban areas, which leads to the lower per capita consumption and intense
competition between the organized and unorganized segments in rural areas. Furthermore,
demand in rural areas is cyclical and significantly depends on the amount of rainfall in a
particular year. Rural India contributes about 1/3 of sales of consumer products
companies, with some firms like Hindustan Unilever and Dabur recording 45-50% of their
sales from rural areas. In the past, any crop failure resulted in lower sales of these
companies.

Impact of Union Budget 2018

The overall impact of the Union Budget 2018-19 was largely positive for FMCG.
Infrastructure, education, healthcare and rural economy were the major beneficiaries from
this budget, signalling more job creation and spending power in the hands of the largest
population. This will automatically help the FMCG sector by generating strong demand.
Following are the budget’s proposal and their impacts –
 Tax for companies with turnover less than INR 2.5 billion reduced to 25%. This will
increase the margins of MSMEs and will encourage them to scale up their production.
 The standard deduction of Rs. 40,000 for transport allowance and reimbursement of
miscellaneous medical expenses will increase the disposable income in the hands of the
common people.
 Hike in customs duty on import of products such as fruit juices and vegetable juices,
edible oils of vegetable origin are expected to boost the domestic sector.
 Providing a boost to the food processing sector by doubling allocation to Rs. 1400 crore
On the face, there is little direct gain for corporate India in the Union Budget provisions for
FY18-19. However, consumer and farm sector-related companies are likely to gain by way
of higher demand for their products in the coming quarters. With emphasis on doubling
farmers’ income by 2022 and providing various schemes and initiatives to boost the
rural economy, disposable income in rural India will increase. Following are some of
the proposals for the rural segment -
 MSP for Kharif crops to be raised to 1.5x the cost of produce this year. It is expected to
increase the disposable income of farmers & boost demand and consumption.
 100% tax deduction to companies registered as farmer-producer companies with
turnover of Rs. 100 crore is another big step.
 National Health Protection Scheme (NHPS) to provide Rs. 5 lacs benefit per family every
year to 100 million households.
 Free cooking gas to 80 million poor households
 Women contribution to Provident Fund (PF) reduced to 8% (of basic salary), from 12%
in the first three years translating into higher disposable income
 Allocation to the food-processing sector doubled to Rs. 14 billion – likely to benefit fruit
& vegetable growers.
 An agri-market infrastructure fund with a corpus of Rs. 20 billion will be set up for
developing and upgrading agricultural marketing infrastructure
 Launch of Operation Green on the lines of Operation Flood with total corpus of Rs. 5
billion to check volatility in prices of basic veggies like onion and tomato.
 Allocation to farm credit increased to Rs. 11 trillion from Rs. 10 trillion earlier.

Key Government Policies
EXCISE DUTY
 Excise duty on instant tea, quick brewing black tea, and ice tea would be
decreased to reduce the retail price by 30%
 Excise duty on other beverages and lemonade would be decreased to reduce
retail sale price by 35%
 Excise duty on various tobacco products other than beedi would be increased,
resulting in retail price of tobacco products going up by 10-15 per cent
FDI IN ORGANISED RETAIL
 The government approved 51% FDI in multi-brand retail in 2006, which will
boost the nascent organised retail market in the country
 It also allowed 100% FDI in the cash and carry segment and in single-brand retail
FOOD SECURITY BILL
 FSB would reduce prices of food grains for Below Poverty Line (BPL) households,
allowing them to spend resources on other goods and services
 This is expected to trigger higher consumption spends, particularly in rural India,
which is an important market for most FMCG companies
SETU SCHEME
 Government has initiated Self Employment and Talent Utilisation (SETU) scheme to
boost young entrepreneurs. Government has invested US$ 163.73 million for this
scheme

Impact of GST
Supply Chain Infrastructure

 Introduction of GST as a unified tax regime is leading to a re-evaluation of procurement
and distribution arrangements
 Removal of excise duty on products has resulted in cash flow improvements
 Major consumer product manufacturing are aligning their supply chains, IT
infrastructure and warehousing systems ahead of unified GST regime, so as to facilitate
seamless interstate movement of goods.
 The GST is expected to transform logistics in the FMCG sector into a modern and
efficient model as all major corporations are re-modelling their operations into larger
logistics and warehousing.
 Warehousing cost for FMCG companies is estimated to fall by 25-30% backed by the
implementation of the GST. The number of warehouses will decrease from 45-50 to 25-
30 and the size of warehouses will become larger
Pricing and Profitability

 The rate of GST on services lies between 0-18% and on goods lies between 0-28%
 Elimination of tax cascading is expected to lower input costs and improve profitability
 Prices of commodities in the FMCG sector, like soaps, shampoo, detergents, biscuits,
savoury snacks etc. decreased after the implementation of GST, leading to a 3-8%
decrease in prices of goods at modern retail stores
 Application of tax at all points of supply chain is likely to require adjustments to profit
margins, especially for distributors and retailers
Cash Flow
 Tax refunds on goods purchased for resale implies a significant reduction in the
inventory cost of distribution
 Distributors are also expected to experience cash flow from collection of GST in their
sales, before remitting it to the government at the end of the tax-filing period
System Changes and Transition Management

 Changes need to be made to accounting and IT systems in order to record transactions
in line with GST requirements and appropriate measures need to be taken to ensure
smooth transition to the GST
 It is estimated that India will gain USD 15 billion a year by implementing the GST

Company Overview: ITC Limited

About the company
ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of
India Limited. As the Company's ownership progressively Indianised, the name of the
Company was changed from Imperial Tobacco Company of India Limited to India Tobacco
Company Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the
Company's multi-business portfolio encompassing a wide range of businesses - Fast
Moving Consumer Goods comprising Foods, Personal Care, Cigarettes and Cigars, Branded
Apparel, Education and Stationery Products, Incense Sticks and Safety Matches, Hotels,
Paperboards & Specialty Papers, Packaging, Agri-Business and Information Technology -
the full stops in the Company's name were removed effective September 18, 2001. The
Company now stands rechristened 'ITC Limited', where ‘ITC’ is today no longer an acronym
or an initialised form.
Key Statistics
 One of India’s most admired and valuable companies, with a market cap of ~3.6 lakh
crores
 ITC’s FMCG products reach every 2nd household in India
 A USD 10 billion enterprise by Gross Sales Value, with ~59% of net revenue from non-
cigarette segments
 Leading FMCG marketer in India, with a portfolio of 25 world-class mother brands
within a short span of time
 ITC Foods is the 3rd largest in India
 ITC & its group companies employ over 32,000 people directly, and its sustainable
development models and value chains have supported creation of ~6 million
sustainable livelihoods
 A global exemplar in sustainable business practices, being the only enterprise in the
world of comparable dimensions to have achieved and sustained the 3 key global
indices of environmental sustainability of being ‘water positive’ (for 16 years), ‘carbon
positive’ (for 13 years), and solid waste recycling positive’ (for 11 years)
Vision Statement
“Sustain ITC’s position as one of India’s most valuable and admired corporations through
world-class performance, creating growing value for the Indian economy and the
Company’s stakeholders”

Key Corporate Strategies

 Focus on the chosen business portfolio
 Blend diverse core competencies residing in various businesses to enhance the
competitive power of the portfolio
 Position each business to attain leadership on the strength of world-class standards in
quality and costs
 Craft appropriate ‘Strategy of Organisation’ and governance processes to enable focus
on each business and harness diversity of portfolio to create unique sources of
competitive advantage
Business Portfolio (FMCG)

Cigarettes
 Market leadership across all segments – Geographic & Price
 State-of-the-art technology and world-class products
Branded Packaged Foods Portfolio

 It includes biscuits, staples, snacks, noodles & pasta, confectionery, RTE, Juices, Dairy,
Chocolates and Coffee
 It is one of the fastest growing foods business in India in line with the Company’s
strategic objective of being the leader in the premium segment, ITC Foods has most of
its offerings in the top-end segment.
 ITC’s Food Business is able to offer differentiated products by sourcing ingredients
directly from farmers, given the deep rural linkages fostered by the Company’s Agri
Business, including the renowned e-Choupal initiative.
 ITC is well-positioned to establish itself as the ‘most trusted provider of food products
in the Indian market’. Today, Aashirvaad is the no. 1 atta brand in India, Sunfeast is the
leader in the cream biscuit segment and 3rd largest biscuit brand, Yippee! Is the No. 2
instant noodles, Bingo! Is the 2nd largest brand in the salted snacks segment, Candyman
is a leading confectionary brand and Kitchens of India is a leader in the premium RTE
packaged foods market.
Communication & Consumer Engagement

Personal Care Products

 The business continues to enhance market
standing in the Fragrance and Liquids
(handwash & bodywash) categories
 Recent category launches –
1. Premium skin care range – Dermafique
2. Premium bath care range – Fiama
3. Moisturising skin cream – Charmis
4. Floor Cleaner - Nimyle
 ‘Engage’ range of deodorants continue to
strengthen its market standing
1. Clear No.2 brand in the category, No.1
in Women’s segment
2. ‘Pocket Perfume’ range drive robust
growth
3. Range augmented with the launch of
unique slider-flip pack
Communication & Consumer Engagement

 Deepening consumer engagement in Vivel anchored on Women’s Empowerment
through ‘AbSamjhautaNahin’ & ‘Know Your Rights’ initiatives
 Savlon’s ‘Healthy hands

Chalk Sticks’ initiative won
7 Lions at Cannes 2017 and
Grand Prix for Creative
Effectiveness at Cannes
2018

Education & Stationary Products

 Classmate, Sathi and Paperkraft brands continue to
enhance market standing by leveraging the company’s
paper & printing expertise and distribution network
 Industry growth driven by increasing literacy and
enhanced scale of government and public-private
education initiatives
 Classmate is the Market Leader in Notebooks segment
and has been deepening consumer engagement through Classmateshop.com and
MyClassmate App to deliver customized notebooks
 ITC is also trying to increase presence in writing instruments and scholastic products
segment leveraging the Classmate brand
Lifestyle Retailing
 ‘Wills Lifestyle’ brand is positioned at the premium end of the
market and is available at ~350 outlets across multiple channels
including six exclusive boutique stores across ITC Hotels
 ‘John Players’ is positioned in the Youth Fashion segment, and is
available in ~750 points-of-sale national and regional
department stores, exclusive stores and multi-brand outlets
Incesnse sticks & Safety Matches

 ‘Mangaldeep’ continues to fortify its market standing in the
Agarbatti and Dhoop segment
 ‘AIM’ continues to be the largest selling safety matches brand
in India
 Launched in September 2016 on both Android and iOS
platforms the Mangaldeep App is currently available in nine
languages and caters to the everyday devotional needs of
consumers

Annual Consumer Spends of ~16000 crore (FY18)
ITC’s FMCG Businesses Growth (other than Cigarettes)
in ₹ crore
12000 11329
10512
9731
10000 9038
8122
8000 7012
6000
4000
2000
0
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Key Financials (Q1 FY19 – Consolidated)
 Gross Sales Value – ₹ 18,172 crores (13.5% growth)

 EBITDA - ₹ 4,202 crores (12.2% growth)
 PAT - ₹ 2,819 crores (10.1% growth)

Consumer Durable Goods

Consumer Durables are a category of consumer products that do not wear out quickly and
have to be purchased frequently because they are made to last for an extended period of
time (typically over 3 years). The consumer durable goods can be broadly classified under
2 categories shown below:
Under consumer appliances/domestic appliances, the industry is further classified under

‘White goods’ and ‘Brown goods’. White goods are large household appliances that mainly
include Air Conditioners, Washing machines and Refrigerators and other kitchen
appliances while the brown goods have mostly kitchen appliances and other cooking range
products. Consumer Electronics are equipment intended for routine use, most often in
entertainment, communications and workplace productivity.

Some of the key consumer durables brands in India are: Whirlpool, Blue Star, Carrier,
Godrej India, Bajaj Electricals, Orient, Philips, Samsung, Sony, Hitachi India Limited, Sharp
India Limited, Tata, LG, Onida, Toshiba India Private Limited, Videocon, and Voltas etc.
Production of Consumer Durables

White Goods

The production of white goods over the last 5 years has shown inconsistent growth rates.
While the demand for refrigerators and air-conditioners depend mainly on the weather,
demand for washing and laundry machines depends on the level of disposable income in
the households. In FY18, with near normal monsoon in the country, the demand for
refrigerators and air-conditioners remained subdued.
In terms of ACs, of the total consumption, imports stand at about 45-50% annually while
exports remain negligible. For Refrigerators, imports form a marginal 1-2% share of the
total consumption of the country and the exports form a small share of about 4-6%.
Brown Goods

por
Porter’s Five Forces Analysis

Evolution of Consumer Goods in India
•Closed market
1980s and early •Increased Product Availability, increased media penetration and advertising
1990s Pre
Liberalisation
•Liberalisation of markets
•Influx of global players such as LG and Samsung
Mid and Late •Shift in focus from promotion to product innovation
1990s -
Liberalisation
•Increasing availability and affordability of consumer finance provides impetus to growth

•Low penetration of high end products such as ACs
Early 2000s
Growth
•Companies look to consolidate market share

•Indian companies such as Videocon gaining global identity
•Increasing penetration of high end products such as air conditioners (>3 per cent)
Late 2000s •Introduction of new aspirational products such as High Definition TVs (HDTVs)
Consolidation •Companies targeting high growth in rural market
•Basic custom duty rate of 10 per cent is applicable on good such as microwave ovens, air
conditioners, televisions, washing machines and refrigerators.
•They can now be imported as completely built units from SAFTA and ASEAN countries like
Japan and Thailand at concessional rates of BCD ranging from 0-6 per cent.
2017 Onwards •Goods and Services Tax introduced from July 2017, with most electronics goods taxed at 18 per
cent.

Consumer Durables Market Overview

The consumer durables industry is one of the most dynamic and fastest growing industries
in India and is considered to be one of the largest in the world. Indian Consumer Durables
sector is vast in scope – including a range of household and industrial electronics – air
conditioners, televisions, washing machines, refrigerators, air coolers, laptops and personal
computers and a wide range of other household/domestic appliances & conveniences.
Approximately over 65% of the total revenue for the sector is generated from the urban
population and the rest from rural India.
 The consumer durable market, has in the past registered strong growth of about 16.3%
CAGR between FY12 and FY17 to cross Rs 1 trillion (US $ 15.5 billion) in FY17 (IBEF
estimate). In FY17 alone, the industry registered a growth of about 24% y-o-y.
 However exports of major durables registered a decline of over 11% y-o-y during the
year. Also, in FY18, consumer electronics exports from India reached Rs 2,334 crore vis-
à-vis Rs 3,913 crore during the same period last year registering a decline of over 40%.
 The consumer durables index (which has a broader set of commodities include
including some automobiles) under the Index of Industrial Production (IIP) grew 8.6%
in FY18 (Apr-Feb) vis-à-vis a 0.1% growth registered during the same period last year.
 Indian appliance and consumer electronics (ACE) market reached Rs 2.05 trillion (US$
31.48 billion) in 2017.
 It is expected to increase at a 9 per cent CAGR to reach Rs 3.15 trillion (US$ 48.37
billion) in 2022.
 India is one of the largest growing electronics market in the world. Indian electronics
market is expected to grow at 41 per cent CAGR between 2017-20 to reach US$ 400
billion.
 Consumer electronics exports from India reached US$ 362.12 million in FY18 and US$
76.51 million in April-May 2018.
 Television industry in India is estimated to have reached Rs 660 billion (US$ 10.19
billion) in CY2017 and projected to reach Rs 862 billion (US$ 13.31billion) in CY2020.
Key sub-market value growth rates over

FY17-22—ACs (16.6%), Air Coolers
(17.7%), Lights (16.0%), Pumps (14.0%),
Fans (13.0%), Cables & Wires (13.5%),
Refrigerators (12.0%) and Washing
Machines (10.0%) have been estimated.
Opportunities for innovations, new
market categories and ongoing
Premiumization also indicate that
surprises, if any, should be on the upside. There are only a few market segments, even in
India that will double over the next 4-5 years—consumer durables should be one of them.

SWOT Analysis
• Presence of established distribution networks in

both urban and rural areas
STRENGTHS • Presence of well known brands
• In recent years, organised sector has increased its
share in the market
• Demand is seasonal and high during festive

season
WEAKNESS • Poor government spending on infrastructure
• Low purchasing power of consumers
• The penetration level of white goods is lower as

compared to other developing nations
• Unexploited rural markets
OPPORTUNITIES • Rapid urbanization
• Increase in income level and purchasing power
• Easy availability of finance
• Higher Import duties on raw materials imposed

THREATS • Cheap imports from Singapore, China and other
Asian Countries

Key Products
Colour TVs (CTVs)
 CTVs are the largest contributors to this segment

 Television industry in India is estimated to have reached Rs 660 billion (US$ 10.19
billion) in FY2017 and projected to reach Rs 862 billion (US$ 13.31billion) in
FY2020.
 The number of TV homes in the country has gone up by 19 per cent to 183 million.
Number of TV households in India is expected to reach 200 million by 2020.
 The Indian Readership Survey found that there has been an overall % increase in TV
ownership in Indian Households. TV ownership stood at 61% in 2017.
 Tamil Nadu had the highest TV penetration with 93% followed by Kerala at 90%.
Punjab and NCR tied at third position at 88%. The lowest reach, as per the IRS, was
of Bihar with 22%.
 Rural farm incomes and Rural Electrification programs would be the major demand
drivers for TVs in the country.
 The major players are Sony, Samsung, LG, Videocon and Phillips.
Flat Panel Display
 India got its first LCD manufacturing plant in 2018. Until now, all the LCD were
imported in India.
 The price decline due to relatively low import duty on LCD panels, higher
penetration levels and the introduction of small entry-size models.
 The production of LCD/LED TVs rose to 12 million valued at US$ 3.3 billion in FY16
from 8.8 million valued at US$ 2.5 billion in FY15.
 The market for flat panel displays in India was estimated at 261 million units in
2016.
 Government schemes such as Housing for All (PMAY), Power for All (Saubhagya
Scheme) is expected to drive sales for the segment
 The major players are Sony, Samsung, Videocon, LG and Phillips.
Direct-To-Home (DTH)
 With expansion of the DTH (Direct-to-Home) and introduction of the Conditional

Access System (CAS) in metros , the Set-Top Box (STB) market is growing at a rapid
pace
 As per TRAI, DTH net active subscriber base in India reached 67.56 million as of
December 2017, registering a y-o-y growth of about 7.8% thereby making India one
of the world’s largest DTH market

Refrigerators
 This segment made up 27 per cent of the consumer appliances market in 2017.
 The market share of direct cool and frost free segment in FY18 is estimated at 70
per cent and 30 per cent respectively.
 The estimated market size in value for refrigerators in India is estimated to be Rs
195 billion (US$ 3.02 billion in 2017 and is expected to reach Rs 344 trillion (US$
5.34 billion) by 2022. Production of refrigerators in India increased 3 per cent year-
on-year in 2017-18* to 11.88 million units.
 Direct cool category constitutes 75% while frost free segment stands at about 25%
of the total market share
 The estimated market size of Refrigerators in volume terms is over 10 million units
as of FY17 while in value terms, it is Rs 195 billion (US$ 3.02 billion) as of 2017. .
 The major players are Blue Star, Godrej, Samsung, Hitachi, LG, Videocon and
Whirlpool.
Air Conditioners (ACs)
 During FY17, market size for air conditioning in India was estimated at Rs 18,500
crore (US$ 2.76 billion), while the market for room air conditioners was estimated
at around Rs 12,000 crore (US$ 1.79 billion). During 2017-18 production of air
conditioners in India increased 4.9 per cent year-on-year to 3.19 million units.
 High income growth and rising demand for split ACs are the key growth drivers.
Installed stock of room ACs in India increased from two million units in 2006 to 30
million units in 2017 and is expected to be between 55-124 million by 2030.
 ACs are perceived as premium products. Improving standard of living, easy access to
credit and higher disposable income is driving demand for ACs in the country
 The major players are Blue Star, Daikin, Godrej, Hitachi, LG, Samsung and Videocon.
Washing Appliances
 Production of washing appliances in India increased 5.1 per cent year-on-year in

2017-18 to 5.79 million units.
 Fully automatic washing machines are garnering an increasing share of the market
due to reduction in prices and higher disposable incomes
 Competitive prices and higher disposable incomes have led to increase in the
market share of fully automatic washing machines.
 The major players are Whirlpool, Godrej, LG, Onida, Samsung and Videocon

Notable Trends
Expansion into New Segments
 Micromax plans to invest US$ 89.25 million by 2020 for transforming itself into a
consumer electronics company.
 Whirlpool India will launch one new product every two months in 2018 to tap the
entry and premium segments in the country.
 Laurent & Benon Group has forayed into the consumer durables industry in August
2017 with the launch of premium home appliances under the brand Kaden with an
investment of Rs.400 million
Premium Goods
 As a result of increased exposure to global lifestyle and newer technologies,

consumer perception in India has been shifting in favour of premium consumer
durables. These are no more viewed as only utility products.
 Easy finance schemes have been a major enabler for people to opt for premium
products in the market
Growing Luxury Market
 Growing number of HNI’s and women in workforce is boosting demand for luxury
products
 Luxury brands like Porsche, Jimmy Choo are increasing their store presence
 Luxury brands are launching their own websites to cater to Indian luxury brand
market
Increased affordability of products
 Consumer durables loans in India increased by 83% to 19.5 million in 2017-18.

 With the initiative of “Make in India” campaign, many domestic and Chinese
manufactures are investing in India to set up their manufacturing plants which
would produce more affordable products.
Contract Manufacturing
 Leading consumer durable companies have started outsourcing manufacturing to

local contact manufacturers like Dixon, Amber and Jabil. Amber contract
manufactures ACs for Voltas, Hitachi, Daikin, Godrej and others while Dixon contract
manufactures washing appliances, phones and other products for various brands.
 As of June 2018, Xiaomi has also partnered with Dixon to manufacture around
55,000 Mi TVs every month.
Strategies Adopted by CD Companies in India

Powerful Competitive Strategies
 To reduce the price of their products, Xiaomi followed a totally different approach.
Rather than using traditional advertising it has used inexpensive social media
campaigns which helped the company in producing mobile phones at competitive
prices in the market
 Samsung has acquired JBL and Harman Kardon for US$ 8 billion, other brands to
come under Samsung are Mark Levinson, AKG, Lexicon, Infinity and Revel, Bowers
and Wilkins and Bang and Olufsen brands.
Marketing Strategies
 The firms are now partnering with e-retailers to promote sales and increase
penetration in the Indian market.
 In February 2017, Microsoft Corp announced a strategic partnership with Flipkart,
by virtue of which, Flipkart will adopt Microsoft Azure as its exclusive public cloud
computing platform and help customers in shopping online.
 Birla Cellulose, a part of Aditya Birla Group’s Grasim Industries, is taking its Liva
brand of viscose fabric abroad. The company has already established a Liva
Accredited Partners’ Forum (LAPF) in Bangladesh and Indonesia, and is looking to
set up a similar forum in China as well.
Opportunity Based Marketing
 India is the land of occasions and festivals, therefore, customers are offered great
deals
 For instance the prices of products during Diwali, New Year, etc. go down and
customers are offered with great deals. Such strategies are adopted so as to enhance
revenues plus to maintain the goodwill amongst buyers.
Focus on Energy Efficiency
 Companies also plan to increase the use of environment-friendly components and

reduce e-waste by promoting product recycling
 India has made it mandatory for manufacturing companies to control emissions
from climate-damaging refrigerants.
 Bureau of Energy Efficiency is encouraging companies to manufacture 35 Watt fans
 In February 2017, Panasonic launched Sky Series air conditioners with the radiant
technology.
 In March 2018, Blue Star launched 40 new models of highly energy efficient air
conditioners

Opportunities and Growth Drivers
Higher Incomes
 Demand for consumer durables in India has been growing on the back of rising
incomes; this trend is set to continue even as other factors like rising rural incomes,
increasing urbanization, a growing middle class and changing lifestyles aid demand
growth in the sector
 Significant increase in discretionary income and easy financing schemes have led to
shortened product replacement cycles and evolving life styles where consumer
durables, like ACs and LCD TVs, are perceived as utility items rather than luxury
possessions

 Growth in demand from rural and semi-urban markets to outpace demand from
urban markets
 Growth in online retailing is a key factor to reach out as a newer channel for buyers,
with increase in demand.
 Per capita GDP of India is expected to reach US$ 3,274 in 2023 from US$ 1,749 in
2017.
 Non metro markets namely Vishakhapatnam, Bhopal, Vadodara, Chandigarh etc.
have grown rapidly in regard to consumption, becoming the main target markets,
posing a huge potential transforming themselves into new business centers as
compared to metro cities.
 In the last decade, Indian economy has progressed rapidly. Correspondingly, India’s
per capita GDP has gone up from Rs 80,518 in FY13 to Rs 127,292 in FY18 at a CAGR
of 9.6% fuelling a consumption boom in the country.
 Correspondingly, the per capita personal disposable income surged from Rs 82,408
in FY13 to Rs 128,894 in FY18 at a CAGR of 9.4%. Also, the per capita private final
consumption expenditure too rose from Rs 45,461 in FY13 to Rs 74,915 in FY18 at a
CAGR of 10.5%. The growth in country’s per capita GDP in turn has increased the
disposable income of the populace ultimately driving the country’s consumption.
Rapid Urbanization and Growing Working Population
 A majority of India still lives in ‘villages’. This statement no doubt holds true but the
figures suggest that there has been a paradigm shift of the Indian populace in terms
of rural–urban divide. The aspirations of higher income, higher standard of living
etc. has drawn more and more people from villages to settle in towns and cities.
 This transition from rural to urban areas has led to an increase in the demand for
goods (owing to higher income and ever-expanding needs). The consumer durables
manufacturers are therefore targeting the ‘middle class’ populace by ensuring the
availability of varied products at various price ranges to match the needs of a
‘common man’.
 As much as 70 per cent of the consumption growth in India in the next 15 years will
come from the working population (people aged 15-59 years), according to a new
McKinsey & Company study. It further predicts 79 per cent of growth in the next 15
years in India will come from increased per-capita consumption. The study says
urban population growth in the country will be moderate at 2.2 per cent and
consumption growth will be concentrated in Mumbai, Delhi, Ahmedabad,
Hyderabad and Bengaluru.
Growing Spread of Plastic Money and easy availability of credit
 The growing use of ‘plastic money’ i.e. credit and debit cards has resulted in an
increased spending amongst the consumers thereby fuelling the demand in the
durables sector. With the acceptance of plastic money by almost all the retailers in
the organized segment, the number of outstanding plastic cards in the country is on
a rise.
 The incentives such as cash-back offer or discounts on selected sales linked to the
plastic money have lured the Indian consumer to experience the pleasure of
‘cashless shopping’. Also, with year round discounts on e-commerce, reduced tax rates
and advancements in technology at lower costs, demand is further expected to get a
boost.
 The increasing popularity of easily available consumer loans and the expansion of
hire purchase schemes will give a moral boost to the price-sensitive consumers. The
attractive schemes of financial institutions and commercial banks are increasingly
becoming suitable for the consumer. Consumer goods companies are themselves
coming out with attractive financing schemes to consumers through their extensive
dealer network. This has a direct bearing on future demand.
 There has also been a rise in the 0% EMI schemes and this further incentivizes the
purchase of consumer durables across all income levels. Be it iPhones, LEDs,
Washing Machines, all sort of products are available at the 0% EMI schemes

Changing face of Indian Consumerism – from necessity to luxuries
 With rise in income level of Indian populace and increase in plastic money,
discretionary spending has become important. As a result, most of the durable
goods such as ACs and refrigerators that were considered to be luxury before are
now considered to be a necessity. Private Final Consumption Expenditure (PFCE) on
consumer durables grew at CAGR of over 10% between FY12 and FY17.
Private Final Consumption Expenditure
Rising growth in number of nuclear families
 The rapid growth of population, increased urbanization and the unavailability of

large real estate spaces have led to the growth of nuclear families in the country.
The average number of person per household has reduced from 5.6 in FY81 to 4.9 in
FY11.
 The growing number of households has not only pushed the demand for necessities
but the combined mix of greater purchasing power and willingness to spend has
resulted in the nuclear family’s shifting focus towards luxury/semi-luxury products.
This has thus led to higher demand for durables in the country

Rise in Investments
To meet the rising local demand and export demand to neighbouring regions and MEA,
companies are planning to expand their local manufacturing in India and make the country
an export hub. Major Indian and global consumer durables companies have announced
investments of around US$1.4 billion over the coming years in India. Primary sales driven
are by low cost, made for India, and made in India products. Thus, it makes a lot of sense to
promote campaigns such as Make in India. . Manufacturing domestically will not just slash
input costs but is more economically viable than importing finished goods from other
countries. The industry will foresee its record-high investment of Rs.37.3 billion in 2016-
18. Some recent investments in Consumer Durable segment:
 Intex Technologies will invest around Rs 60 crore (US$ 9.27 million) in 2018 in
technology software and Internet of Things (IoT) startups in India in order to create
an ecosystem for its consumer appliances and mobile devices.
 Micromax plans to invest US$ 89.25 million by 2020 for transforming itself into a
consumer electronics company.
 In January 2018, Panasonic started its first refrigerator plant in India with an annual
production capacity of 500,000 units with an investment of Rs 115 crore (US$ 17.76
million).
 British technology company Dyson will invest around Rs 1,300 crore (US$ 200
million) in the Indian consumer durables sector by 2023.
 In August 2017, V-Guard acquired 49.43 per cent stake in GUTS Electro-Mech.
 In October 2017, Flipkart launched its private label ‘MarQ’ for selling large
appliances in India.
 In May 2017 Havells completed acquisition of Lloyd consumer durables business for
an enterprise value of Rs 1,600 crore (US$ 248.2 million)
 Chinese phone manufacturer, Xiaomi Corporation, is planning to invest about US$ 1
billion in 100 Indian start-ups over the coming five years, with an aim to make an
ecosystem of apps surrounding its smartphone brand.
Opportunities from Digitalization
 DTH players are expected to get

largest share in phase IV area of
digitization market.
 Digitization may lead to
complete switchover from
analogue cable to Digital
Addressable Systems in a phased
manner.
 Active DTH subscribers in the
country increased from 62.65
million in December 2016 to
67.53 million in March 2018.

Government Policies and Regulations

EHTPs
 For encouraging exports of electronic hardware items including hard disk drives,
computers, television, etc., such parks have been developed by the Ministry of
Communications & Information Technology. An Electronic Hardware Technology Park
(EHTP) may be an individual unit by itself or a unit located in an area designated as
EHTP Complex. As in the case of STP Scheme, the EHTP Scheme is also administered by
the Ministry of Communications & Information Technology.
 An EHTP may import free of duty capital goods, raw materials, components and other
related inputs. However these should not be on the negative list of prohibited items in
the Foreign Trade Policy. Second hand capital goods may also be imported by EHTP
units.
Customer Duty Relaxation
Reduced custom duty on certain inputs like metals, wires, cables, refrigerators compressor
parts will promote the production of consumer electronics in India. Custom duty on
LCD/LED TV reduced to nil from 10 per cent
Encouragement to FDI
100 per cent FDI is permitted in electronics hardware-manufacturing under the automatic
route. FDI into single brand retail has been increased from 51 per cent to 100 per cent; the
government is planning to hike FDI limit in multi-brand retail to 51 per cent
National Electronics Policy and Government Initiatives
 A new National Electronics Policy will be finalized by Government of India in the second
half of FY19. It aims to create an ecosystem for a globally competitive electronic
manufacturing sector and to achieve a turnover of about US$ 400 billion by 2020,
including investments of about US$ 100 billion, as well as to provide employment to
around 28 million people.
 The government’s focus on rural electrification under the Deendayal Upadhyayaa
Gram Jyoti Yojana (DDUGJY) with total outlay of Rs 756 bn (US$ 12 billion) over FY14-
19 and Power For All (a joint initiative by Government of India (GoI) and state
governments) with the objective to make power available to all and facilitate 24X7
power supply. This scheme has been one of the key drivers for strong growth in the
consumer durables industry. With increasing number of villages being electrified each
year and the government’s target to achieve Power for All by FY19

Financial Performance
The financial performance of the consumer durables industry in India has been analysed
for air-conditioner, domestic appliances and electronics players in the country.
 Net sales of consumer durables registered only a marginal increase of 1.4% y-o-y in
FY18 (Apr-Dec) over a 15% growth registered last year during the same period, with
air-conditioners sales registering a slower growth of about 13.7% y-o-y (27.8%),
domestic appliances sales growing by just about 2.8% y-o-y (20.9%) and sales of
electronics registering a decline of about 11.4% y-o-y (1.2%).
 Operating profits increased by a marginal 2.2% in FY18 (Apr-Dec) vis-à-vis a sharp

22.2% increase registered last year. Operating profits were skewed by the weak
performance of air-conditioners and electronics segment players during the period.
However, domestic appliances players registered a growth, however, lower, of about
9% as compared with a growth of 16.3% increase in FY17 (Apr-Dec).
 However, contrary to sales and operating profits, net profits have recorded a sharp
increase of over 80% during the period led by performance of air-conditioner players
and electronics players, where profits doubled in FY18 (Apr-Dec) period. Also, domestic
appliances registered growth of about 33% y-o-y during the period. Lower depreciation
and interest costs supported the net profits growth of durables players.
 Operating margins remained largely stable at 9.6% in FY18 (Apr-Dec) compared with
same period last year. Operating margins of domestic appliances players and
electronics players expanded by about 60 basis points respectively while margins of AC
players contracted by about 90 basis points during the period.
 Net margins of consumer durables expanded by over 300 basis points led by an
expansion of about 700 basis points in margins of AC players followed by over 100
basis points expansion in margins of domestic appliances players and about 75 basis
points expansion in margins of the electronics players.

Benefits of FDI to CD Sector

According to the Department of Industrial Policy and Promotion, during April 2000 –
March 2018, FDI inflows into the electronics sector stood at US$ 1.92 billion.
51% FDI in multi brand retail – Status: Approved
 Minimum investment cap is USD 100 million

 30% procurement of manufactured or processed products must be from SMEs
 Minimum 50 per cent of the first minimum tranche of US$ 100 million must be
invested in back-end infrastructure (logistics, cold storage, soil testing labs, seed
farming and agro-processing units)
 50% of the jobs in the retail outlet could be reserved for rural youth and a certain
amount of farm produce could be required to be procured from poor farmers
 To ensure the Public Distribution System (PDS) and Food Security System (FSS),
government reserves the right to procure a certain amount of food grains
 Consumers will receive higher quality products at lower prices and better service
100% FDI in single brand retail – Status: Policy passed
 Products to be sold under the same brand internationally

 In 2015, according to revised FDI regulations single brand retail companies if desire
to sell on ecommerce platform would be allowed only if they have licence for setting
up physical outlets
 Sale of multi brand goods is not allowed, even if produced by the same manufacturer
 For FDI above 51 per cent, 30 per cent sourcing must be from SMEs
 Any additional product categories to be sold under single brand retail must first
receive additional government approval
 “Make in India” initiative to further strengthen the investments coming to India
Challenges to the Industry

GST
 The changing tax rates have left the players confused as to how to strategize.
 Though in the long run GST is an opportunity, it becomes vital to decide the final
price and the margins that are to be passed on in the supply chain.
Limited Scale and Quality

 The suppliers of raw material and components do not have the scale to cater to the
substantial demand in the industry, making them less competitive against imports.
 The quality of the inputs is not as competitive to Chinese or other SE Asian
counterparts. This has led global majors to scale down operations in India.
Increasing Competition
 Indian manufacturers face strong competition from Chinese and other SE Asian
counterparts, which have a huge supply base and installed capacities.
Ongoing Trade War

 With the US-China led trade war, the global prices in the world could be impacted if
the war goes bitter and is not restricted to its current state.
 With Protectionism in the air, if exports and imports are hampered, the domestic
manufacturers and consumers will suffer alike since India is heavily dependent on
imports for a range of inputs.
Capital Intensive and Infrastructure Dependent
 Cost of production in India is higher as compared to China and other SE Asian

countries due to high finance costs.
 Given the frequently changing energy efficient norms, manufacturers will need to
invest substantial amounts for products with high rating. The cost of capital is high
compared to the global average.

Company Overview: Whirlpool

About the Company
Whirlpool of India Limited (WIL) is a manufacturer of home appliances. The Company is
primarily engaged in manufacturing and trading of Refrigerators, Washing Machines, Air
Conditioners, Microwave Ovens and small appliances and caters to both domestic and
international markets. It provides services in the area of product development, and
procurement services to Whirlpool Corporation, the United States and other group
companies. Its geographical segments include Sales within India, which represents sales
made to customers located within India and Sales outside India, which represents sales
made to customers located outside India. The Company also offers Water Purifiers, Built-In
Appliances and Induction cooktop. The Company offers accessories for Refrigerators,
Washing Machines, Air Conditioners, Microwave Ovens and Water Purifiers. It offers Surge
Protector and Affresh Accessories. Its plants are located at Faridabad, Haryana; Rajangaon,
Pune, and Thirubhuvanai Village, Puducherry.
Products
WIL manufactures refrigerators and washing machines in its Indian manufacturing

facilities located at Faridabad, Pondicherry and Ranjangaon, which accounts more than
80% of revenue. WIL outsources Air Conditioners, Microwave Ovens and other products
from Chinese manufacturers. In Indian refrigerator market, WIL has competitive position
over the other industry players as WIL has strong presence in both mass and mid segment
refrigerator category. LG is the market leader with ~25% market share followed by
Samsung. WIL is largely present in mass and mid segment category with limited products
in the premium segment. Further, WIL has one of highest products offering in the
refrigerator category with more than 180 products in its portfolio. The company has strong
presence in the economy segment (direct cool refrigerator) and this segment contributes
about 75% of refrigerator sales, while industry average is 70%. Management is also
stressing to drive growth in the auxiliary product segments and further strengthen its core
product offerings. The company intends to increase contribution from the non-refrigerator
products (such as AC, microwaves, water purifiers, air purifiers and built in kitchens) from
the current level of 10% to 20% of total sales in the next 4 years.
Strong Distribution Network
WIL has been aggressively deploying its resources in expanding & innovating its product
portfolio and distribution reach, which is believed underpin its market share across the
products. WIL already has vast distribution network for all its products which company is
leveraging through consistent new product launches in past few years. Brand, distribution
& service network and dealer margins are the key success factors in the industry which
helps to gain market share.

Whirlpool JV with Elicia

Whirlpool India announced a strategic joint venture with Elica and acquired 49 percent
equity in Elica PB India. As part of the joint venture, Elica PB India will manufacture and
distribute cooking and built-in appliances under the Whirlpool brand. The core categories
under whirlpool ranges from refrigerators/ washing machines/air-conditioners and
microwave ovens, kitchen appliances, spares, accessories and income from services while
Elica India is engaged in the manufacturing and trading of kitchen equipment such as hobs,
kitchen hoods, ovens and dishwashers. The JV was part of the strategic investment
prioritize in expanding the cooking and built-in appliance portfolio. The deal is likely to
benefit Whirlpool in greater access to the design and manufacturing capabilities as well as
distribution network of Elica India which in turn would benefit in deep market penetration
and faster growth in the cooking and built-in appliance segment.
Healthy Revenue Growth

WIL sustained its strong-growth trajectory with a healthy revenue growth of 13% YoY in
1QFY19, indicating robust traction for its consumer durable portfolio. The healthy growth
was achieved despite an unfavorable summer season owing to unseasonal rains across
India. This impacted industry growth of cooling products like refrigerators (~61% of WIL’s
sales) and air-conditioners (~10% of WIL’s sales). The home appliance industry is
expected to post a 15% CAGR over the next five years, WIL is likely to outpace the home
appliance industry’s growth. Distribution reach expansion, plugging of portfolio gap (front-
load washing machine, high-end refrigerator) and scaling up of other product categories
are likely to be key drivers of growth for WIL. We expect WIL to post 18% revenue CAGR
over FY18-FY20E.
Healthy Margin Profile

Gross margin expanded 170bps YoY to 37.6% in 1QFY19 (on a low base) and was broadly
in line with FY18 gross margin level of 37.9%. EBITDA margin increased 40bps YoY to
14.8% as 1Q is a seasonally strong quarter for margin. With core strengths like strong
brand perception, superior quality products and in-house manufacturing, WIL gives
precedence to healthy profitability and free cash flow. With rising economies of scale (18%
revenue CAGR) and strong focus on managing costs, EBITDA margin is likely to rise 90bps
over FY18-FY20E to 12.5%. Further, WIL has very high cash and investments on its books
worth Rs14.4bn in FY18, which is likely to rise to Rs20.4bn in FY20E. Rising cash and
investment will lead to a rise in other income, translating to higher earnings CAGR of 31%
over FY18-FY20E

Key Risks
Raw materials for a specific product is procured from different locations across the world,
location specific risks might impact largely on costs, profitability and market position. Also
the volatility in currency can be one of the important factor adding to the risk for the
company. Slowdown in economy might change the consumer spending patter and a major
shift in consumer behavior can be seen with regards to cut back on lavish and impulsive
shopping behavior which might lead to a shift in low-demand growth environment and
thus low growth for the company.
Valuation
Whirlpool of India Limited (WIL) has a strong brand recall in the Indian consumer goods
industry. It is the leading player in the refrigerator category which also contributes
majority of the revenue. However, the company intends to invest in noncore areas such as
AC, microwaves, water purifiers, air purifiers and built in kitchens to increase penetration
in revenues, in order to provide the next leg of growth. In consumer durables segment,
brand, distribution network are the key parameters to gain market share and WIL has a
strong foothold in each of them. Over the years the company has built a strong pipeline of
products and garnered one in the top 3 positions in all product categories it is present in.
The industry is in a sweet spot as the economy is on a strong footing. Consumer durables
sector and GDP has a strong correlation since it feeds into higher disposable income, a
primary driver for higher sales.

Tailwinds
Low Penetration of Consumer Durable in India
India is one of the largest consumer durables market in the World. Compared to developed
nations, India’s consumer durables market offers immense growth potential and has been
registering a CAGR of 13%. It remains underpenetrated despite the quick pace of
advancement. Electronic items which were formerly considered as luxury goods for a long
period of time have become basic necessities today. In refrigerators segment, the
penetration is only 21% in India, a fourth of the global penetration of about 85%, while
penetration of washing machines is still under 10%. Penetration of air-conditioners is also
minuscule, at just above 3%. Strong economic growth, rising per-capita income, changing
lifestyles, and better brand awareness have led to an uptick in discretionary spending in
India in the past few years. Government’s initiatives towards urbanisation and
transmission network augmentation, electric supply channels have been able to cover the
previously underserved regions of India. The access to electricity has improved from
45.1% of the population in 1990 to 79.2% of the population in 2014 and that bodes well for
the consumer durable industry immensely. Besides, apart from steady growth in income of
consumers, consumer financing has become a major driver in the consumer durables. In
urban regions, share of financing in purchase of consumer durables has increased from
10%-15% couple of years ago to under 50% of purchases in urban areas. The financing
companies are now reaching out or expanding in rural areas to tap the untapped/
unbanked market which is holding a great potential for the consumer durables sector.
Moreover, changing consumer demography & preference and government’s increasing
focus on housing and sustained impetus on village electrification are other major thrust
areas for the sector to do well in future.
GST rate cut to boost sentiments
Government reduced the GST rates of refrigerators, freezing equipment, washing machines,
vacuum cleaners and television sets from 28% to 18%. Such pleasant move might lead the
consumer durable sector to return to double-digit growth which had been witnessing a
slower growth for the past six quarters. The cost benefit for the customer with the rate cut
from 28% to 18% is expected to be around 7-8% which seems like a big percentage cut and
would boost the sentiments of the consumers during the festive season. The festive season
accounts up to 35% of the consumer durables sales followed by Normal monsoons and hike
in allowances to government employees coupled with GST rate cut would propel further
demand.

Retail
Retailing is a distribution channel through which goods are sold in small quantities to the
final consumer. A retailer is typically a reseller, who buys products from a manufacturer/
supplier/ distributor and sells them to customers, without altering characteristics of the
product significantly. Generally, retailers are at the end of the distribution channel.
However, a manufacturer may also be a retailer if he sells products directly to customers.
Retail formats
Organised Retail: A forum whereby consumers can buy goods from a similar purchase
environment, across more than one physical location. These typically comprise chain
stores, either owned or franchised by a central entity
Unorganised Retail: Small retailers selling goods under traditional formats like kirana
stores, street markets, kiosks, and vendoes, where the ownership and management rests
usually with one person only
Organized Retail
Type Features Product Mix Average Brands

Store Size
Supermarkets Self-service format A self-service format 2000- Food
retail outlets and their offerings 10000 bazaar,
providing consumers focus mainly on the More,
a wider range of food food and grocery Reliance
and household segment, personal Fresh
merchandise. care and other FMCG
products

Self-service Including food and Average sq. Hypercity,

Hypermarkets superstore, large grocery items ft. 75,000 Star
stores with retail available at sq ft to Bazaar,
spaces supermarkets, 150,000 sq Spencer
hypermarkets also sell ft Hyper,
apparel, electronics, Hyper
household items and City
furniture
Convenience Small self-service Usually the daily Average sq. Kirana
Stores format retail outlets grocery shopper‘s ft. – 1,000- stores
providing a limited needs are 2,000 located in
variety and encompassed in their crowded
assortment of offerings urban
merchandise in areas
residential
catchments of
crowded urban areas
Wholesale formats Stock a wide array of Average sq Metro,
targeting retailers brands and private ft - 85,000- Carrefour,
Cash & Carry (mom & pop stores), labels across verticals, 125,000 Walmart
hotels, restaurants, including food and sq. ft,
caterers and grocery, apparel,
institutions household appliances,
household items etc
Luxury Involves sale of high- Cater to aspirational Average sq Gucci,

Retailing end luxury needs of consumers, ft - 1,500 Seiko,
brands to the such as esteem, status and 4,000 Bang and
affluent class and pride in owning Olufsen,
expensive items Tiffany
The focus is on one EBO (exclusive brand Average sq. All,

Speciality specific vertical, with outlet) or an MBO ft. - 1,000- Mom&Me,
Stores one or many brands (multi-brand outlet) 5,000 Zara,
under same roof single product Landmark

Retail formats can also be segregated as below:
Exclusive showrooms Complete range

Mono/exclusive owned or franchised available for a given
branded retail shops out by a brand, certified
manufacturer product quality
Focus on particular
Customers have more
Multi-branded retail product categories
choices as many
shops and carry most
brands are on display
brands available
Convergence as well
as consumer/ One-stop shop for
Convergence retail
electronic products customers as many
outlets
including comm. and brands are on display
IT group
It is an online Highly convenient as

shopping facility for it provides 24x7
E-retailers buying and selling access, saves time,
products and and ensures secure
services transaction
Other Types of Retailing

E-Retailing
 It is a form of e-commerce in which the consumers can directly order goods through
the internet
 It is convenient as it is available for 24x7 and offers different deals by various
vendors for the same product range
Tele Shopping
 Also known as Direct Response Television. It is a format in which customers watch a

merchandise demonstration on the TV and place an order by telephone
Catalogue Stores
 It is a form of non-store retailing in which the merchant sells a wide variety of

products through a catalogue

Direct Selling
 It is a retailing format in which sales people contact customers directly, demonstrate

merchandise benefits, take the order and deliver it
Kiosks
 Retail kiosks are located in malls, multiplexes and places where sace is at a premium
and mostly sell categories like edibles, newspaper and magazine, etc
Vending Machine Retailing
 It is a non-store format in which merchandise are stored in a machine and

dispensed to consumers when they deposit cash or use credit card
Various Levels in Retailing

Industry Overview
The Retail market in India has undergone a major transformation and has witnessed
tremendous growth in the last 10 years. The Retail Industry in India has achieved a total
market size of USD 672 billion in 2017 and is projected to reach USD 1.1 trillion by 2020,
while the Indian e-commerce industry is expected to cross USD 100 billion mark during
that year.
The E-commerce market in India is also set to grow at a CAGR of 30% for gross
merchandise value to reach USD 200 billion by 2026, and have a market penetration of
12% compared to 2% currently.
India is largely an unorganized retail market, contributing 92% to the total retail sector in
India. The organized retail market is currently valued at USD 60 billion, while the
unorganized market holds the rest. The share of the organized retail market is projected to
increase to 13% by 2020, thereby reducing the unorganized retail market’s share to 87%.
The organized retail market, therefore, has the potential to reach ~140-160 bn.
10% 8% Consumption expenditure

in India (USD billion)
Contribution to Share in India's
4,000
India's GDP employment
3,000
2,000
4x 3x
1,000
Rise in Growth in 0
consumption Organized Retail 2017 2020F
India is the world’s fifth largest global destination in the retail space. It surpassed
China to grab the No. 1 spot in A.T.Kearney’s 2017 Global Retail Development Index
India to have more internet users (650 million) than the entire population of six
G7 countries by 2021
India to become third-largest consumer economy by 2025 (consumption

expenditure to increase by a factor of 3 to reach USD 4 trillion)

Improving economy, relatively stable inflation to drive retail industry
Rs. trillion 12% CAGR

120 14% CAGR
100
100
80
59
60 53
38
40
28
20
0
2012-13 2014-15 2017-18 2018-19P 2022-23P
Indian Retail Industry to grow in medium to long term
12,000
Growth affected due to 11000
5 yr CAGR 20-22%
slowdown in the economy
10,000 between fiscal 2012 and 2015,
demonetisation in fiscal 2017
8,000
Last 5 yrs CAGR 15% 21%
6,000 19%
5,014
4,156
4,000 3,496
2,050
2,000
0
2012-13 2016-17 2017-18 2018-19P 2022-23P
Organised retail to grow at 20-22% CAGR in the long term
Source: CRISIL Research

Organised Retail Penetration

Food and Grocery – Huge Opportunity, but low ORP
Food and grocery is retail market's largest vertical as it includes the retailing of fresh fruits
and vegetables, dairy products, poultry and seafood, staples, cereals, processed foods,
ready-to-eat meals, spices and other edible products.
However, despite its large size, this vertical has been primarily dominated by extremely
small retailers like mom-and-pop stores (kiranas), cart vendors, paan shops as well as wet
markets (mandis), etc. The vertical faces stiff competition from kiranas offering free home
delivery services and credit facilities. As a result, despite the fact that Food and Groceries
has a majority market share of ~67%, the organised retail penetration (ORP) is still low at
around 3%. However, it is expected to grow the fastest on the back of significant offline as
well as online impetus, however ORP will remain low due to stiff competition.
Given the ability to enhance overall shopping environment and offer an extensive choice of
products and discounts, apart from the non-discretionary nature of spends, makes the
vertical an attractive proposition for players.
Fresh Food and Private Labels

In India, on an average, fresh produce purchases are made thrice a week from cart vendors,
who in turn buy from wholesalers. Retailers have identified this gap and tried to bridge it
with direct farm procurement (wherever possible and feasible), thus shortening the chain
(by eliminating middlemen) and passing on the cost savings to the consumer. Modern
retailers in the food category also offer value-added products like 'cut vegetables'. Many
modern retailers have tried to fill the gaps existing in products and price points by
introducing 'private labels' that are brands owned and sold by retailers at their stores and
are priced lower (5-15%) than the existing brands. For example, Flipkart launched its
private label brand ‘Billion’ last year, which sells everything from T-shirts to Air
Conditioners.
Apparel & Lifestyle – High margin business for organised retailers

Indian organised retail began with sale of apparel and textile manufacturers such as
Raymond and Bombay Dyeing. They were among the first to set up their own stores for
readymade garments and home textiles. Today, apparel accounts for ~12% share of total
retail and 28% share of organised retail, and wil register faster growth among verticals.
Apparel retailing of men's wear has developed at a reasonable pace over the years, with
early entrants such as Raymonds, Arvind Brands, Zodiac. Retailers are now looking for

opportunities in the women's (particularly ethnic wear and women's western wear) and
kids' wear. Apparels vertical is characterised with highest margins; low procurement cost
enables competitive pricing for customers and better margins for the retailer. The vertical
also offers retailers the opportunity to introduce private labels.
Changing fashion trends and rise in consumer incomes are primary demand drivers. The
market's profitability depends upon factors such as size of the retail store and spectrum of
products provided.
Footwear – Early mover advantage leading to high ORP

The Indian footwear industry has witnessed a spurt in activity over the last few years, with
the changing consumer attitude towards footwear. Shoes, initially positioned as a value
purchase, are now transcending into a lifestyle purchase. As a result, ORP in the Indian
footwear segment is increasing gradually.
Organised retailing in this segment commenced with players like Bata and Liberty, who
offered value-for-money products. On the other hand, chains such as Metro, Citywalk and
Regal catered to the lifestyle segment. With increasing competition, value-oriented players
such as Bata and Liberty have transformed their formats to life-oriented retail, although
they retained their contemporary Indian brands as well. The ladies and the kids segments
in the branded footwear market are growing rapidly and many foreign brands such as
Catwalk have set their footprints here. Other international players like Aldo, Charles and
Keith, Pavers England, Clarks, etc. have also forayed into the Indian footwear market.
Reebok India, Nike, Adidas and Action are the various other brands available in the
sportswear category.
Health and Pharmaceuticals – Slowly gaining prominence in organized

retailing
The size of pharmaceutical products market is estimated at Rs 1 trillion, of which organised
retail accounts for around Rs 66 billion. The share of ORP in this segment is estimated at
5.4%. Changing disease profiles (from infectious to life-related), growing health awareness,
preventive approach to healthcare and longer life expectancy are the main growth drivers.
Several players are entering the organized pharma space given that it's need-based, unlike
fashion, and hence, not prone to any sudden demand change. Players offer not just
medicines, but also enhanced services, such as home delivery; free medical check-up
camps; discounts; free health insurance to regular customers; day-and-night service;
prescription reminder service; loyalty programmes with reward points and helplines for
queries related to medication that are answered by doctors.

Books and Music Retailing – Limited to Urban Areas

The total share of retail market for books and music is only 2-4%, with an ORP of 3%;
penetration is concentrated in urban areas. The differentiating factors for organized
formats are ambience, wide assortments of goods and additional services such as book-
reading sessions. However, the demand for Books & Music will further decline due to stiff
competition from unorganised kirana stores.
Key players include Planet M, Music World, Landmark and Crossword. The segment has
been impacted by increased internet usage and mobile-phone penetration. Music
downloads on phone/internet and growing presence of e-tailers like Amazon are offering
stiff competition to book and music retailers, who could also encounter risks in the form of
piracy.
Airport Retailing
Airport retailing is still at a nascent stage in India. Earlier retailing at airports was mainly
restricted to categories such as alcohol, chocolates and perfumes. However, expansion and
modernization of airports across key cities has resulted in development of quality retail
space at these airports. This has resulted in many retailers such as Shoppers Stop, Croma,
Satya Paul, Hidesign, Kimaya, Marks & Spencers, etc. opening up outlets at airports.
Airports also provide a conducive environment for luxury retailers, who are otherwise
confined to five-star hotels and luxury malls. The increasing passenger traffic is expected to
drive the growth of airport retailing in India.
TeleShopping
TeleShopping, or Television home shopping, popularly known as the Direct Response
Television (DRTV), is a retail format in which a customer watches a television program that
demonstrates a product and then places an order for the merchandise over phone. TVC Sky
Shop Ltd, Telemart Shopping Network Pvt. Ltd. and HomeShop 18 are the few leading
television home shopping playerspresent in India.
The three forms of electronic home shopping retailing are:
 Cable channels or DTH services dedicated to television shopping

 Direct-response advertising - It takes the form of advertisements on TV and radio that
describe products and provide an opportunity for consumers to order them.
 Infomercials - Infomercials are TV programs, typically 30 minute-long,, that mix
entertainment with product demonstrations and then solicit orders over phone.

Vending Machine Retailing

This is a non-store format in which merchandise or services are stored in a machine and
dispensed to consumers, where they deposit cash or use a credit card. Vending machines
are placed at convenient, high-traffic locations, such as workplaces or university campuses,
and primarily offer snacks and drinks.
Kiosks
Retail kiosks are located in malls, multiplexes, railway stations and airports where space is
at a premium. These outlets mostly engage in categories such as edibles and snacks,
newspapers and magazines, fashion accessories, etc. Ice-cream vendors like Baskin
Robbins and AMORE, coffee shops, cosmetic retailers like Nyassa, Chambor and food
vendors like Brownie Cottage and Moktu are examples of retail kiosks in India.
Catalogues
This too is a non-store retail format in which the merchant sells a wide variety of products
through a catalogue. Products are not displayed but the customer selects products from
printed catalogues. Today, online retailing has replaced catalogue retailing. For e.g.,
Amway, Tupperware and Oriflame.
Organized Retail 2017-18
Market Size ORP Past 3yr CAGR

Segments
Rs. Billion % %
Food and Grocery 925 3.1% 23%
Apparel 1,146 22.0% 16%
Footwear 220 18.5% 14%
Furniture, Furnishing, and household

171 7.0% 17%
equipment
Pharmacy 75 4.6% 14%
Consumer Durables, Mobiles, and IT 319 26.4% 12%
Books and Music 49 6.9% 1%

Others 1,251 11.8% 16%
Total Organized Retail 4,156 7.9% 17%

Value Chain
Source: Sunstone Knowledge: Retail Sector

Porter’s Five Forces Analysis for the Indian Retail Industry
Threat of Substitutes
 LOW – Threat of substitutes

is low. However, customers
may purchase products
from a local store instead of
purchasing from a retailer
Supplier Power Competitive Rivalry Buyer Power
 HIGH – Entry of foreign  HIGH – The consumers are

 LOW – Retailers have low players and e-tailers have price sensitive, and have
switching costs, which make intensified competition information about the
the supplier power low.  Customers’ low switching product and its price
Large retailers can easily cost increases competition  Low switching cost gives
switch to different suppliers  The retail sector is highly customers high bargaining
fragmented power
Threat of New Entrants
 HIGH – Entry as a retailer is

quite simple. However,
players need to establish
strong distribution channels
and achieve economies of
scale to compete

Advantage to Retailers in India

India has occupied a remarkable position in global retail rankings; the country has high
market potential, low economic risk and moderate political risk. India’s high growth
potential compared to global peers has made it more favourable, given that it is expected to
become the third largest consumer economy, reaching USD 400 biliion in consumption by
2025 (according to BCG).
ROBUST DEMAND INNOVATION IN FINANCING

1. Healthy economic growth, 1. Collective efforts of finacnial
changing demographic profile, houses and banks with retailers
increasing disposable incomes, are enabling consumers to go for
changing consumer tastes and durable products with easy credit
preferences are driving growth in 2. In April 2018, ICRA revised the
the organised retail retail credit growth outlook for
2. Rapid urbanisation with NBFC to 17-18% for FY18 and 19
increasing purchasing power has
led to growing demand
3. Retail space demand is
expected to increase at the rate
of 81% to 7.8 million sq. ft
INCREASING INVESTMENTS POLICY SUPPORT

1. Foreign retailers are 1. About 51% FDI in multi-brand
continuously entering the market retail
2. Cumulative FDI inflow in retail 2. 100% FDI in single-brand retail
as of March 2018 stood at USD under the automatic route
1,212.34 million 3. Introduction of GST as a single
3. 100% cash and carry unified tax system
operations are gaining 4. To provide a level-playing field
significance in India with to stakeholders, the govt. is
Thailand's Siam Makro being the planning to synchronise policies
latest entrant in this space, of retail, FMCG and e-commerce
following Metro, Walmart and within a single policy framework
Booker

Growth Drivers for Retail in India

Demand-side factors
 Growing number of youth and working women
 Rising income levels and increasing disposable income.
 Increasing brand consciousness
 Changing consumer preferences and growing urbanisation
 Increasing number of high net-worth individuals.
Supply-side factors
 Rapid real estate infrastructure development
 Easier access to credit: For example, Future Group has entered into a strategic
partnership with Bajaj Finance for easy EMIs to buy goods ranging from apparel and
grocery to highend consumer durables
 Increased efficiency due supply chain improvement
Growth Value Proposition

Growth Opportunities in Indian Retail Industry

Large number of retail outlets
 The sector is experiencing exponential growth, with retail development taking place
not just in major cities and metros, but also in Tier-II and Tier-III cities
Rural markets offer significant growth potential
Private Label Opportunities
 The organised Indian retail industry has begun experiencing an increased level of
activity in the private label space
 In April 2018, the organised retail sector is forecasted to witness strong growth in
the coming years.
 The share of private label strategy in the US and the UK markets is 19 per cent and
39 per cent, respectively, while its share in India is just 6 per cent. Stores like
Shopper Stop, Lifestyle generates 15 to 25 per cent revenues from private label
brands.
Sourcing base
 India‘s price competitiveness attracts large retail players to use it as a sourcing base
 Global retailers such as Walmart, GAP, Tesco and JC Penney are increasing their
sourcing from India and are moving
 from third-party buying offices to establishing their own wholly-owned/wholly-
managed sourcing and buying offices
Luxury Retailing
 Luxury retailing is gaining importance in India. This includes fragrances, gourmet

retailing, accessories and jewellery among many others.
 The Indian luxury market stood at around US$ 18.6 billion in 2016 from US$ 14.7
billion in 2015 , thereby registering a growth of 26.5 per cent.
 Luxury market of India is expected to grow to US$ 30 billion by the end of 2018
from US$ 23.8 billion in 2017 supported by growing exposure of international
brands amongst Indian youth and higher purchasing power of the upper class in tier
II and III cities, according to Assocham.

Strategies Adopted by Retail Companies in India
STRONG DISTRIBUTION AND LOGISTIC NETWORK
 It is imperative for a retailer to have a strong distribution and logistics network

to succeed in this sector. Players follow a distribution network that suits them
the best. For example, Shoppers Stop follows a ‘Hub and Spoke’ model for its
distribution network to increase efficiency and productivity.
HYPER PERSONALISATION
 Indian retailers use hyper-personalisation models based on behavioural data,

brands performance, demographic preference and pin codes as marketing
strategy which boosts sales.
FOCUS
 Tanishq is focussing on expanding its large format-retailing concept, with re-

launching their showrooms in Velachery.
 Avenue Supermart’s D’Mart has set a strong focus on providing everyday low
prices and operating at low cost, to pass on that benefit to the customer. It has a
no-frills approach and works towards strengthening its original strategy
 In May 2017, Myntra voiced intentions to increase its market penetration by
spending on technology and buying more brands instead of spending on
discounts and marketing
LOWERING PRICES
 Certain retailers adopt a ‘first price right’ approach. Retailers do not offer
discounts under this strategy; they directly compete on the selling price by
offering a best price without any markdowns

OMNI-CHANNEL RETAILING
 Retailers are opting for many channels to maximize sales. Many retailers in India
are adopting Omni Channel retailing. For example, EZone has launched an online
platform, which has led to an increase in sales
 In February 2017, Myntra became the 1st ecommerce brand to manage he fashion
brand – Mngo’s Omni Channel presence globally
 As of February 2018, Paytm Mall has decided to enter into physical retail and
planned to set up a brick-and-mortar store in New Delhi, co-branded with Red
Tape shoes, where customers can walk in, scan product bar codes, browse and
make purchases via its mobile app. The company is targeting 400 stores by
February 2019.
 In February 2018, Amazon launched its food retailing business called Amazon
Retail India Pvt. Ltd. In Pune, India, on a pilot basis, thereby becoming the first
foreign ecommerce company to stock and sell food products directly to
consumers
OFFERING DISCOUNTS
 Most retailers have advanced off-season sales from 15 days to a month with
discounts of 20-70 per cent on certain products
 Higher discounts and other value-added services for members
OFFERING VALUE-ADDED SERVICES

 Companies offer innovative value-added services, like customer loyalty
programmes and happy hours on shopping deals
 Offers for senior citizens, contests for students and lottery gains are now very
common
LEVERAGING PARTNERSHIPS
 To keep customers on shop floors for a longer time and increase conversions,
retailers are now pitching to partner with manufacturers, service providers,
financial companies, etc. to create a buzz around certain product categories

STRONG SUPPLY CHAIN
 Critical components of supply chain planning applications help retailers to

maintain profit margins
 Retailers develop innovative solutions for managing the supply chain problems
 Innovative solutions like performance management, frequent sales operation
management, demand planning, inventory planning, production planning and
lean systems can help retailers to get advantage over competitor
JOINT VENTURES
 To diversify the product offerings and tab the growing luxury retail segment,
retailers are forming joint ventures with foreign luxury brands. Reliance Brands
Ltd. formed a joint venture with Bally, a Swiss luxury brand, to exclusively
market its products in India
CHANGING THE PERCEPTION

 Retailers benefit if consumers perceive their store brands to have consistent and
comparable quality and availability in relation to branded products. For this,
retailers are providing more assortments for private level brands to compete
with supplier's brand. New product development, aggressive retail mix and
everyday low pricing strategy help to get edge over supplier's brand
CASH ON DELIVERY
 Online retail segment offers cash-on-delivery and manufacturers’ warranty to
boost e-retailing in consumer durable sector.
 Cash-on-delivery is the most preferred payment option with over 30 per cent of
buyers opting for it in India

Government Policies and Regulations
51% FDI in Multi-Brand Retail
 Minimum investment cap is USD 100 million

 30% procurement of manufactured or processed products must be from SMEs
 Minimum 50% of total FDI must be invested in backend infrastructure (logistics,
cold storage, soil testing labs, seed farming and agro-processing units)
 Removes middlemen and provides better price to farmers
 Development in retail supply chain system
 50% of jobs in retail outlet could be reserved for rural youth and a certain amount
of farm produce could be required to be procured from poor farmers
 To ensure the Public Distribution System (PDS) and Food Security System (FSS), the
government reserves the right to procure a certain amount of food grains
 Multi-brand retail would keep food and commodity prices under control
 Will cut agricultural waste as mega retailers would develop backend infrastructure
 Consumers will receive higher quality products at lower prices and with better
service
100% FDI in Single-Brand Retail
 Products to be sold under the same brand internationally. Sale of multi-brand goods
is not allowed, even if produced by the same manufacturer
 100 per cent FDI allowed in single-brand retail under the automatic route.
 Single brand retail entities have been allowed to set off their incremental sourcing of
goods from India for global operations during the initial five years starting from the
1st April of the year of the opening of first store, as against the compulsory sourcing
requirement of 30 per cent of purchases from India.
 100 per cent FDI in retail trading of food products manufactured or produced in
India.
 Liberalisation of FDI is expected to give a boost to ease of doing business and Make
in India.

Amendment to FDI in Multi Brand retail policy

Foreign players bring with them strong expertise of retailing as well as ability to optimise
back-end operations. Improving the back-end operations of retailers will lead to improved
supply chain and reduction in costs, which could be passed on to consumers and help
improve company margins. The increased investment by the foreign players would likely
lead to large scale employment in modern retail, which would be beneficial for the
economy. Also, the increased competition will benefit the customer due to the increase in
choices from which the customer can choose from.
 Mandatory investment in back-end infrastructure only for first

tranche of investment
In the amendment to the FDI policy, the government has clarified that minimum
50% of the first tranche of USD100 million (i.e. USD 50 million) would be required
to be invested in the backend infrastructure. Subsequent investment in the back-end
infrastructure can be made by the retailer only if needed.
Impact:
Only retailers operating in supermarket and hypermarket formats (where the share
of F&G is greater than 50 per cent) would be able to adhere to this clause. The F&G
vertical needs investments in the back-end as the supply chain is currently
underdeveloped and inefficient. Retailers operating specialty stores in verticals like

apparel, electronics, etc do not require significant investments in back-end
infrastructure.
Further, the amendment that the mandatory back-end infrastructure investment
would be limited to only the first tranche will bring clarity to foreign retailers
planning to enter India. Mandatory investments in back-end infrastructure for the
subsequent FDI tranches would have been an hindrance for foreign retailers as
CRISIL Research's analysis shows that an investment of USD 50 million in the back-
end infrastructure in the F&G vertical can support a significant front-end space of
around 15-18 mn. sq. ft. (125-150 hypermarkets).
 Definition of MSMEs amended to include companies with investment up to

USD 2 million
The multi-brand policy states that the foreign retailers will have to source at least
30% of the merchandise from MSMEs (micro, small and medium enterprises). The
definition of MSMEs has been amended to include companies which have invested
up to USD 2 million in plant and machinery, without providing for depreciation. The
earlier rider restricted sourcing from MSME to companies that had invested a
maximum of USD 1 million in plant and machinery. Further, the note clarifies that a
company will continue to be qualified as an MSME even if it outgrows the
investment definition of USD 2 million in the course of its relationship with the
retailer. Another clarification issued is that sourcing from agricultural co-operatives
and farmer co-operatives will also be considered to meet this clause. The earlier
clause restricted sourcing only to manufactured and processed products.
Impact:
Amendments pertaining to the sourcing clause will aid the foreign retailers to meet
the mandatory sourcing requirement of 30% from MSMEs. As the foreign retailer
can continue sourcing from the same MSME, the sourcing process will become less
cumbersome.
 Foreign Retailers can now operate in cities with population of less than 1
million
While the earlier policy stated that FDI in retail will be allowed only in cities that
have a population of more than 1 million, the amendment states that the state
government, once they permit FDI in retail, can allow foreign retailers to operate
stores even in cities with less than a population of 1 million.
Impact:
The organised retail market in India is highly concentrated in the larger cities.
CRISIL Research believes that larger cities (with a population of over 1 million) will

be the initial target market for foreign retailers as demand for organised retail
mainly emanates from these cities. Therefore, allowing retailers to operate in
smaller cities will not substantially impact the decision of foreign companies to
invest in India. Moreover, the operating environment for foreign retailers will
continue to be restricted in India as only 11 states and 2 union territories so far
have agreed to allow foreign investment in the retail sector.
E-Way Bill
 E-Way Bill is a unique document/bill, which is electronically generated for the

specific consignment/movement of goods from one place to another, either inter-
state or intra-state and of value more than INR 50,000, required under the current
GST regime
 As per the update on 23rd March 2018, generation of the e-way bill has been made
compulsory for transporters with goods exceeding INR 50,000 from one state to
other
 Fir reducing the burden on ecommerce companies, a single e-way bill can be
generated for several deliveries over the same trip. This will significantly reduce
waiting time for trucks and make the supply chain more efficient
 The rollout of GST will bring more transparency and efficiency in the transport of
goods across the states, by enabling smooth movement of goods and ease in the
method to compute the value of goofs
Industry Status to Retail
The government, in the Union Budget 2018-19 granted industry status to retail. This will
provide easier access to finance and attract more investments.

Challenges to Retail Growth in India
Underpenetration of brands in certain categories
Even in today‘s market, there are certain products that haven‘t penetrated the market as
much as they probably should have and other products that seemingly don‘t have a market
space in the Indian market due to some barriers such as cultural barriers. A prime example
would be the case of toilet paper. In spite of many strategies, there just isn‘t an established
market space for toilet paper. In fact, toilet paper is one product that P&G don‘t even plan
to launch in India because of its belief that there isn‘t a space for it. This is probably due to
the culture that the present generation was accustomed to while growingup.
Spiralling real estate costs
Lack of readily available quality real estate as well as high rentals in India are major
challenges for the retailers. Property rentals in the country are among the highest in the
world and end up adding considerably to the operational costs. Indian real estate costs
accounts for 5-9% of the net revenue of the retailer compared to 3-4% for global retailers.
APMC Act
One of the biggest supply chain bottlenecks in India has been the bureaucratic rigmarole
brought about by APMC Act. Had it not been for APMC, retailers could have sourced raw
materials directly from farmers. This would have reduced supply related bottlenecks and
improved the operating costs of retail players.
In recent times, Maharashtra government decided to amend the APMC Act making it illegal
for a private lender to purchase any agriculture produce below the government-fixed MSP
from the coming Kharif harvest season and any trader who failed to purchase farm goods at
MSP could attract a jail term of one year or fine of Rs. 50,000. However, this hasn’t found
support from several quarters and as of September 2018, no resolution has been issued so
far.
Commission
Pre-harvest Agent/Broker Wholesaler
Farmers Retailer
contractor (APMC (APMC
(Unregulated) (Unregulated)
(Unregulated) Regulated) Regulated)

Supply Chain and Logistics
Availability of the right merchandise at the right place, in the right condition, within the
right timeframe and at a minimum cost is the primary objective of retail supply chain
management. Goods in store but not on shelves could mean loss of sales and an undesirable
customer experience.
Goods in store but not on shelves could mean loss of sales and an undesirable customer
experience. It is also important to vary the assortment and merchandise form one store to
another, even in a single state, to cater to market sensitivities. Investments in specialised
supply chain management (SCM) IT solutions help retailers manage the store as well as
warehouse replenishment and lower inventory holding cost. An economy of scale for the
procurement of goods is also another challenge faced by retailers. Few large retailers have
been able to consolidate requirements and enjoy economies ofscale.
Retail Frauds
Retail frauds have been a concern for the Indian sector. According to the Global Retail Theft
Barometer (GRTB), the shrinkage in India is very high compared to the other countries in
the world.
As per the GRTB, the key reasons for the retail shrinkage or pilferage in India include the
following:
 Shoplifting (accounting for more than 50% of total shrinkagevalue)

 Internal administrative errors
 Employee theft
 Vendor frauds

E-tail in India
The Indian e-commerce industry has been on an upward growth trajectory and is expected
to surpass the US to become the second largest e-commerce market in the world by 2034.
With advancements in quality of internet access, payments and computing on mobility
platforms, changed consumer behavior with a large active internet user base, customers
have the ever increasing choice of products at the lowest rates by various retailers. E-
commerce is probably creating the biggest revolution in the retail industry, and this trend
would continue in the years to come.
Online Retail out of total retail Online Retail out of total retail
in India (2018E) in India (2020)
2.90% 5.00%
97.10% 95.00%
Offline Retail Online Retail Offline Retail Online Retail
Indian E-Commerce Market (USD billion)

250
200
200
150
100
72
64
50
50 39
0
2017 2018F 2020F 2022F 2026F

Online retail business is the next generation format which has high potential for growth in
the near future. After conquering physical stores, retailers are now foraying into the
domain of e-retailing to leverage the digital retail channels (e-commerce), which would
enable them to spend less money on real estate while reaching out to more customers
intier-2 and tier-3 cities.
Customers are generally attracted to e-retail as the industry offers a superior value
proposition across several parameters:
 Wider selection of products

 Higher discounts
 Greater convenience of shopping (including door-step delivery)
 Payment channels (including cash-on-delivery, mobile wallets)
Organised retailing has been dominated by the physical format of delivery. Online shopping
accounted for less than 1% of the industry at the beginning of the 21st century. However,
the scenario has changed rapidly as the ecosystem for e-retailing has evolved since the
advent of India's largest e-retailer, Flipkart, in 2007.
With increasing penetration of internet and e-commerce, the format is expected to expand
at 40-45% CAGR over 2015-16 to 2020-21. E-retailers will account for nearly 31-33% of
the organised market at the end of the period. E-retail market could see significant growth
due to-
 Increasing number of internet users

 Greater usage of smartphones
 Young population
 Promotional prices by online retailers
 Cash-on-delivery options, manufacturers warranty
 Lower cost of connectivity and improved quality
 Expanded reach in lower tier cities and rural areas, backed by investments in
network infrastructure
 Government initiatives such as Digital India, Skill India, Startup India, and Make In
India are also contributing to the growth of the e-commerce industry

Internet users in India (million) Internet users in India

900 829 (million)
800 300
700
700 250
250
600
446 200
500
400 150 125
300
100
200
50
100
0 0
2017 2020 2021 2017 2020
With growing internet penetration, internet users in India are expected to increase from
445.96 million as of Devember 2017 to 829 million by 2021. Rising internet penetration is
expected to lead to growth in ecommerce.
India’s internet exonomy is expected to double from USD 125 billion as of april 2017 to
USD 250 billion by 2020, majorly backed by ecommerce. Digital transactions are expected
to reach USD 100 billion by 2020.
Drop shipping model: Once the order is placed

the retailer intimates the supplier and the product
is shipped to the customer. No inventory holding
Online cost incurred by the e-tailer
Retailing
On demand sourcing model: On receiving order,
E-tailing the 'e-tailer', sources the product to its packaging
Business Model center, undertakes a quality check and then ship it
to the customer
Online Market
Stocking model: This e-tailer holds all products
Place displayed on the website and ships it directly on
receiving orders for the products

Advantage to e-commerce companies in India
GROWING DEMAND
 India is the fastest growing market for the ecommerce sector
 Being driven by a young demographic profile, increasing internet penetration
and relatively better economic performance, India’s ecommerce revenue is
expected to jump from USD 39 billion in 2017 to USD 120 billion in 2020,
growing at an annual rate of 51%, the highest in the world
INCREASING INVESTMENT
 The recent rise in digital literacy has led to an investment in e-commerce firms,
levelling the market for new players to set up their base, while churn out
innovative patterns to disrupt old functioning
 E-commerce industry in India witnessed private equity and venture capital deals
worth USD 2.1 billion in 2017 and six deals worth USD 226 million in January-
April 2018
ATTRACTIVE OPPORTUNITIES
 A lot of India’s blue-chip PE firms had previously avoided investing in e-
commerce but are now looking for opportunities in the sector
 India’s start-up ecosystem is growing supported by favourable FDI policies,
Government initiatives like start-up India and Digital India, as well as rising
Internet penetration driven by market players like Reliance Jio
POLICY SUPPORT
 In India 100% FDI is permitted in B2B e-commerce
 As per new guidelines on FDI in e-commerce, 100% FDI under automatic route is
permitted in marketplace model of e-commerce

Draft e-commerce policy

The e-commerce sector is likely to see significant changes in the coming months with the
recently unveiled draft e-commerce policy that will impact sites like Amazon, Flipkart, Ola,
Swiggy etc. while ushering in a limited inventory business model. Some of the key
proposals are –
The draft policy, which was unveiled late in July, has faced stringent criticism from across
the spctrum for some of the measures that have been proposed. The initial document
received a pushback, including a proposal on foreign investment in some areas and one
requiring Indian consumer data to be held locally. As of 31st August, Commerce Minister
Suresh Prabhu will reach out to all stakeholders to address their issues. The discussions
may lead to an overhaul and a fresh draft e-commerce policy will be posted in due time.

Strategies adopted by e-commerce companies in India
EXPANSION
 E-commerce companies are gradually expanding to different cities, regions and
even countries. They are also expanding their product range to cater to a larger
amount of people. In May 2017, Uber launched UberEats, an on-demand food
delivery app in India
 Flipkart, after getting acquired by Walmart for US$ 16 billion, is expected to
launch more offline retail stores in India to promote private labels in segments
such as fashion and electronics.
 Paytm Mall, ecommerce platform of Paytm, is planning to expand its groceries
segment and is targeting a Gross Merchandise Value (GMV) of USd 3 billion from
this segment by the end of 2018.
ANCILLARY SERVICES
 One of the biggest advantage of E-commerce is that along with the core product
or service it can also provide numerous ancillary services without having to
invest a lot.
 Guaranteed one day deliveries, exclusive deals and video streaming for a
subscription fee, as in the case of Amazon Prime. India is currently the fastest
growing market for Amazon Prime.
 Flipkart introduced its own payment gateway Payzippy and also, its own logistics
and supply chain firm Ekart.
 E-commerce websites are also introducing e-Wallet services; for example -
Amazon’s Pay Balance.
 Paytm has launched its bank - Paytm Payment Bank. Paytm bank is India's first
bank with zero charges on
 online transactions, no minimum balance requirement and free virtual debit card

SUBSCRIPTION FOR ECOMMERCE
 E-commerce companies are increasingly adopting subscription model to provide

extra benefits and tailored services to customers to suit their needs.
 Amazon introduced Amazon Prime, a subscription based service for Amazon
customers, in 2016. members of Amazon Prime could avail early access to
selected deals, free one day delivery and other benefits. Amazon Prime
subscribers in India stood at around 5-6 million as of December 2016
 In 2014, Flipkart introduced Flipkart First, a premium subscription based
services wherein a customer gets free delivery, discounted same day delivery,
priority customer service etc. Paytm has launched its bank - Paytm Payment
Bank. Paytm bank is India's first bank with zero charges on online transactions,
no minimum balance requirement and free virtual debit card
PERSONALISED EXPERIENCE
 Site visitors demand one-of-a-kind experiences that cater to their needs and
interests. Technology is available, even to smaller players, to capture individual
shoppers’ interests and preferences and generate a product selection and
shopping experience led by individualised promotions tailored to them.
 Many E-commerce websites provide personalised experience to customers to
cater to their needs and interests depending upon their location, choices,
products they like or buy, websites they visit etc.
 This strategy has helped companies to know customers’ demands better and
serve them accordingly.

E-tail Value Chain
Stocking Model

Company Overview: Future Retail Ltd.

Future Retail Ltd. (formerly Pantaloon Retail Ltd.) is the flagship company of the Future
Group. Starting off as Manz Wear Pvt. Ltd. in 1987, in Mumbai, India, it now has wider
operations comprising departmental stores, hypermarkets and specialty stores for
electronics and home furnishing & décor.
In 2015-16, there has been a Scheme of Arrangement between Future Retail Limited (FRL)
and Bharati Retail Limited. As per the arrangement, two distinct entities have been created
from the combined businesses of Future Enterprises Limitd and Bharti Enterprises Limited.
Business Profile
Presence across various verticals (as of 30th June 2018)
Retail Space
Name Verticals No. of Stores
(mn. Sq.ft.)
Food, FMCG, Electronics, Apparels,
Big Bazaar Home décor 285 12.1
FBB Apparels 67 0.7
Foodhall Food and FMCG 10 0.1
Easyday Food and FMCG 749 1.7
eZone Electronics 12 0.1
Big Bazaar
Launched in 2001, the store offers a wide assortment of
products across categories such as food & grocery, general
merchandise, apparels, home furnishings, utensils, sports
goods, etc. It also offers products under its private labels.
Apparels (both private and other brands) are sold under
the Fashion at Big Bazaar banner, while groceries, staples
and other FMCG products are sold under the Food
Bazaar brand.
Foodhall
Launched in May 2011, it offers an assortment of fresh and
packaged foods of different international and pan-Indian
cuisine and wide array of kitchen accessories.

HomeTown
Launched in 2006, this is a separate retail chain for
home furnishing and home decor products, including
furniture, bath and Sanitaryware, modular kitchens,
paints, wallpaper, flooring, carpentry and hardware,
lighting, electronics and other accessories. In April
2017, Future retail ltd demerged its home retail and e-
commerce home retail business into a separate entity
called Praxis Home Retail.
eZone
Launched in 2006, these stores market an array of
national and international electronic brands across
categories such as audio, accessories, communication,
computing, home entertainment, home and kitchen
appliances, imaging, personal entertainment and
gaming.
Capital Market Information
Shareholding Pattern
48% 46%
4%
2%
Promoters Mutual Funds Financial Institutions Public

Other Details
Retail front-end businesses of Future Enterprises Limited, including the operations of Big
Bazaar, EasyDay, Home Town, eZone, fbb, Foodhall and others have been consolidated in
retail business of Bharti Retail Limited. On 25th May 2016, Bharti Retail Limited has
changed its name to Future Retail Limited. Backend infrastructure that supports the retail
businesses of the retail chains mentioned above, along with the investments and
manufacturing operations of the two entities (Bharti Retail and Future Retail) has been
consolidated into Future Enterprises Limited.
Financial Performance
Units Mar-15 Mar-16 Mar-17
Operating Income Rs. Million 18,343 68,487 170,831
Operating Margins % -17 1.3 3.4
Net Profits Rs. Million -3,792 151 3,683
Net Margins % -20.7 0.2 2.2
RoCE % -7.5 4.6 18.9
Net Cash accruals to debt Times -0.86 0.05 0.32
Interest Coverage Times -15.6 2 3
Current Ratio Times 0.4 1.4 1.4
The financials for 2016-17 is not comparable with the previous FY 2015-16 as:
 In Financials 2016-17, 12 months combined retail operations of Future Enterprises

Limited (formerly known as Future Retail Limited and Bharti Retail Limited is
considered.
 In financials 2015-16, 12 months operation of Bharti Retail Limited, 7 months of
retail Infrastructure business undertakings and 5 months operation of Retail
Business undertaking of FEL is considered
 The company has moderate debt coverage ratio. The total debt in 2016-17 stood at
Rs.12.4 billion.
Hypercity Acquisition
Future Retail Ltd. announced the acquisition of Hypercity Retail, which is a subsidiary of
Shoppers Stop Ltd., and operates HyperCity large Format stores in October 2017. Updates
on integration –
 Renovations and upgradations continued till 30th June 2018 across the stores
acquired
 EBITDA shinkage reduced from Rs. 38 crore in Q4FY18 to Rs. 22 cr. In Q1FY19
 In the next 6-9 months, we expect HyperCity stores to be at an EBITDA of over 5%
Future Pay Users (in Million)
6.2
6
6
5.8
5.6
5.4
5.2
5
5
4.8
4.6
4.4
Mar'18 Jun'18
Communication and Consumer Engagement

Gems and Jewellery

The Gems and Jewellery sector plays a significant role in the Indian economy, contributing
around 6-7 per cent of the country’s GDP. One of the fastest growing sectors, it is extremely
export oriented and labour intensive.
India's Gems and Jewellery sector has been contributing in a big way to the country's
foreign exchange earnings (FEEs). The Government of India has viewed the sector as a
thrust area for export promotion. The Indian government presently allows 100 per cent
Foreign Direct Investment (FDI) in the sector through the automatic route.
India is deemed to be the hub of the global jewellery market because of its low costs and
availability of high-skilled labour. India is the world’s largest cutting and polishing centre
for diamonds, with the cutting and polishing industry being well supported by government
policies. Moreover, India exports 95 per cent of the world’s diamonds, as per statistics from
the Gems and Jewellery Export promotion Council (GJEPC).Gold, diamond dominate
industry value chain.
The products in the gems and jewellery sector can be classified into gemstones, precious
metals, jewellery, and pearls. Of these, gold and diamonds dominate the value chain. While
domestic demand is driven by gold (jewellery, bars & coins), diamonds are processed and
exported.
Value Chain

Domestic Market
The domestic market can be segregated into:
 Jewellery: Gold jewellery, diamond-studded jewellery and products made using

other precious and semi-precious stones and precious metals.
 Retail sales of gold coins and bars.
Exports and Imports of Gems & Jewellery

The gems and jewellery sector is a significant contributor to India's foreign exchange
earnings. In 2015-16, exports of gems and jewellery contributed a share of around 15% of
country's overall exports (in value terms) by occupying the pole position compared to 13%,
the previous year. The following are the types of exports in Gems and Jewellery -
 Cut and polished diamonds
 Gold and diamond studded jewellery
 Bars, coins and medallions
 Others: Other exports include coloured gemstones, non-gold jewellery, pearls,
synthetic stones, and rough diamonds.

 India is one of the largest exporters of gems and jewellery and the industry is
considered to play a vital role in the Indian economy as it contributes a major chunk
to the total foreign reserves of the country.
 UAE, US, Russia, Singapore, Hong Kong, Latin America and China are the biggest
importers of Indian jewellery.
 The net exports rose from US$ 15.66 billion in FY2004-05 to US$ 32.71 billion in FY
2017-18, at a CAGR of 5.83 per cent over FY05-18.
 In FY18, Hong Kong, UAE and US accounted for 33 per cent, 25 per cent and 23 per
cent respectively, accounted as major export destinations of gems and jewellery.
 The exports stood at US$ 7.96 billion in April - June 2018.
 In FY18, Exports of gold coins and medallions stood at US$ 1,917.09 million and
silver jewellery export stood at US$ 3,385.65 million.
 Exports of gold coins and medallions stood at US$ 121.07 million and silver
jewellery export stood at US$ 119.90 million in FY19.
 India is a major importer of gems and jewellery as well.
 India’s total gems and jewellery imports rose from US$ 11.63 billion in FY2004-05
to US$ 31.52 billion in FY 2016-17, thereby registering a compound annual growth
rate (CAGR) of 7.97 per cent.
 In FY18, India’s imports of gems and jewellery stood at US$ 31.52 billion.
 India’s imports of gems and jewellery stood at US$ 7.623 billion in April - June 2018.

Exports of Cut and Polished Diamonds

 In FY18, India exported US$ 23.73 billion worth of cut and polished diamonds, at a
CAGR of 5.97 per cent and worth USD 6.29 billion in April-June 2018
 An international diamond exchange will be set up in Surat in the next 36 months at a

cost of Rs 2,400 crore (US$ 369.1 million). This will enable the fragmented and
unorganised diamond polishing and trading industry to organise itself at one place.
 The Indian Commodity Exchange (ICEX), backed by the Anil Ambani Group has
launched the first ever futures contract for diamonds in the world, to create many new
opportunities for diamond players.
Export and Import of Gold Jewellery

 India is one of the largest gold jewellery exporters of the world and it exports to around
160 countries.
 In FY18, India’s gold jewellery exports stood at US$ 9,673.23 million and imports stood
at US$ 279.01 million.
 India’s gold jewellery exports stood at US$ 3.16 billion and imports stood at US$ 72.90
million in April - June 2018.
 Mostly high-end jewellery or machine-
made jewellery is imported usually
from Middle East or South East Asia.
 Virtually imports do not consist of
handmade jewellery as that is India’s
area of expertise.
 About 50 per cent of jewellery exports
are plain gold jewellery sets or chains
made in Mumbai, Kolkata and other
cities from Southern India and
exported mainly to UAE, Hong Kong
and Singapore; 30 per cent are in the
form of diamond jewellery mainly
manufactured in Mumbai and
exported to US, UAE and Hong Kong;
and remaining 20 per cent precious
and semi-precious gem jewellery
manufactured in western Indian states
like Rajasthan and Gujarat and
exported to UAE and UK.
Diamond Processing
Gold Processing
GOLD MINING
EXTRACTION AND REFINING
GOLD DEALERS AND TRADERS
JEWELLERY MANUFACTURERS
RETAIL STORES

Market Analysis
India's gems and jewellery sector is one of the largest in the world contributing 29 per cent
to the global jewellery consumption. The market size of the sector is about US$ 75 billion as
of 2018 and is estimated to reach US$ 100 billion by 2025. The sector is home to more than
300,000 gems and jewellery players, contributes about 7 per cent to India’s Gross Domestic
Product (GDP) and employs over 4.64 million employees.
India's gems and jewellery sector contributes about 15 per cent to India’s total
merchandise exports. The overall net exports of gems and jewellery stood at US$ 32.71
billion during FY18 registering a compound annual growth rate (CAGR) of 5.83 per cent
over FY05; whereas gems and jewellery imports increased at a CAGR of 7.97per cent from
US$ 11.63 billion in FY05 to US$ 31.52billion in FY18.
India is the world’s largest centre for cut and polished diamonds in the world and exports
75 per cent of the world’s polished diamonds. Today, 14 out of 15 diamonds sold in the
world are either polished or cut in India. India exported US$ 6.29 billion worth of cut and
polished diamonds in April - June 2018.
India is the largest consumer of gold in the world. Rising middle class population and
increasing income levels are the key drivers for the demand of gold and other jewellery in
India. Gold demand in India rose 11 per cent year-on-year to 737.5 tonnes in 2017. Also,
the Government of India has permitted 100 per cent Foreign Direct Investment (FDI) in the
sector under the automatic route. The Bureau of Indian Standards (BIS) has revised the
standard on gold hallmarking in India from January 2018, to include a BIS mark, purity in
carat and fitness as well as the unit’s identification and the jeweller’s identification mark on
gold jewellery. The move is aimed at ensuring a quality check on gold jewellery. The
Government of India launched the Gold Monetisation Scheme to reduce the country’s
reliance on gold imports to meet the domestic demand
Investments/Developments
The Gems and Jewellery sector is witnessing changes in consumer preferences due to
adoption of western lifestyle. Consumers are demanding new designs and varieties in
jewellery, and branded jewellers are able to fulfil their changing demands better than the
local unorganised players. Moreover, increase in per capita income has led to an increase in
sales of jewellery, as jewellery is a status symbol in India.
The cumulative Foreign Direct Investment (FDI) inflows in diamond and gold ornaments in
the period April 2000 – December 2017 were US$ 1,111.52 million, according to
Department of Industrial Policy and Promotion (DIPP).
Some of the key investments in this industry are listed below.

 An international diamond exchange will be set up in Surat by October 2020 at a cost

of Rs 2,400 crore (US$ 372million).
 Companies such as PC Jewellers, PNG Jewellers, Popley and Sons, are planning to
introduce a virtual-reality (VR) experience for their customers. The customer will
have to wear a VR headset, through which they can select any jewellery, see the
jewellery from different angles and zoom on it to view intricate designs.
Government Initiatives
 The Government of India would notify a new limit for reporting about transactions
in gold and other precious metals and stones to authorities, to avoid the parking of
black money in bullion.
 The Bureau of Indian Standards (BIS) has revised the standard on gold hallmarking
in India from January 2018. The gold jewellery hallmark will now carry a BIS mark,
purity in carat and fitness as well as the unit’s identification and the jeweller’s
identification mark. The move is aimed at ensuring a quality check on gold jewellery.
 The Government of India has planned to set up a Common Facility Center (CFC) at
Thrissur, Kerala.
 The Gems and Jewellery Export Promotion Council (GJEPC) signed a Memorandum
of Understanding (MoU) with Maharashtra Industrial Development Corporation
(MIDC) to build India’s largest jewellery park in at Ghansoli in Navi-Mumbai on a 25
acres land with about more than 5000 jewellery units of various sizes ranging from
500-10,000 square feet. The overall investment of Rs 13,500 crore (US$ 2.09
billion).
Domestic jewellery - Industry Structure

The Indian gems and jewellery market comprises jewellery (gold and silver), diamonds,
coloured stones and pearls, among others. Gold jewellery accounts for about 80% of the
market, followed by diamond and platinum jewellery with 19% and 1% share, respectively.
The organized sector accounts for about 22% of the total market share. However, an
increasing number of large showrooms with diverse products, guarantee for purity and
value for money have quickly gained trust among customers. Driven by these factors, the
organized sector is expected to grow at a steady pace and increase its market share in the
future.

Regulatory Bodies
GJEPC
The Gems and Jewellery Export Promotion Council (GJEPC). This was established in 1966
with the aim of introducing India’s gems and jewellery to the global market and to support
export growth. As promoter of the sector, GJEPC organises jewellery shows, fairs and
exhibitions and is responsible for the marketing campaign on behalf of the sector. It also
acts as a mediator between traders and the government and runs training institutes in
major Indian cities. It provides statistics on external trade in gems and jewellery.
All India Gems and Jewellery Trade Federation
The All India Gems and Jewellery Trade Federation (GJF). This is the national-level sector
association and the largest single trade body in India for promoting trade in gems and
jewellery nationwide. It represents over 600,000 players, comprising manufacturers,
wholesalers, retailers, distributors, laboratories, gemologists, designers and those
providing allied services to the domestic gems and jewellery industry.
The Bureau of Indian Standards

The Bureau of Indian Standards. This is the national standards body in India, which sets the
benchmarks for gold jewellery in the country.

Growth Drivers
Safe investment: Gold is one of the best performing and most stable assets across the
globe over the long run.
Traditional demand: In India, gold demand is mostly for jewellery and, of that, 50-60% is
for weddings. With nearly 50% of India’s population being under the age of 29, and about
15 million weddings expected annually in the next decade, the demand for gold jewellery
shall be steady.
Rising middle class and their disposable income: India’s middle class population is
expected to increase to 1250 million in 2048 from 270 million in 2018. The disposable
incomes of such middle class is on the rise as well, thus giving them the power to buy more
gold.
Penetration of organized players: Organized retailers, expanding aggressively, are

expected to contribute increasingly to the growth of the industry. The organized sector is
capitalizing on its financial strength, trust factor, product portfolio, quality, and ability to
provide various financing options to customers.
Rising Gold Demand: Rapidly increasing middle class and rich class has led to an increase
in the demand of gold. India’s demand for gold reached 737.5 tonnes in 2017 and 115.6
tonnes between January-March 2018.
Rising female workforce: With increasing job opportunities, rising demand for skilled
labour and for India to maintain its growth momentum, there is a drive to encourage
participation of women. Women being primary consumers of gold jewellery, their
increasing entry into the workforce and disposable income would drive demand.
Superior skill sets have won sector global recognition

The sector has won worldwide acclaim due to the availability of skilled craftsmen, superior
techniques for polishing & cutting and cost efficiency. Players source, manufacture, process
and sell gold, silver, platinum and precious gemstones. In India, gold jewellery is most
preferred as it is considered auspicious to purchase gold on occasions like festivals,
marriage, birth etc. Gold is also perceived as a relatively safer investment option.
India is also the world's largest diamond processor with artisans capable of processing
small diamonds (of below one carat). The real uniqueness is that Indian craftsmen
manually cut and polish gems. Surat in Gujarat is the world's largest diamond cutting and
polishing centre. Diamonds processed in India account for about 80% in carats, about 90%
in pieces and close to 55% in value of the global diamond market

Threats
Changing consumer preferences: The gems and jewellery sector, being driven by latest
fashion and trends, is highly fluctuating in nature with consumer preference changing
quickly. This can severely impact the liquidity position of the Company, in case products do
not match the consumer requirements.
Competition from unorganized players: The unorganized sector dominates the gems
and jewellery industry in India, accounting for about 78% share. These players are mostly
family jewellers having strong and long-standing relationship with middle-class
consumers.
Government Schemes and Regulatory Framework
The Goods and Services Tax:
The Goods and Services Tax (GST) which was rolled out in July 2017 was in favour of the
gems and jewellery sector. The Government of India has levied 3 per cent Goods and
Services Tax (GST) on gold, gold jewellery, silver jewellery and processed diamonds and
0.25 per cent on rough diamonds.
Union Budget 2018-2019:
In the Union Budget 2018-19, a proposal to cut down corporate tax of companies with
annual revenues of up to Rs 250 crore (US$ 38.62 million) to 25 per cent is expected to lead
to increased investment and employment generation in the gems and jewellery sector.
Corporate Tax Rate:
The Government of India’s proposal to cut corporate tax rates to 25 per cent for micro,
small and medium enterprises (MSMEs) having annual turnover up to Rs 50crore (US$ 7.5
million) will benefit a large number of gems and jewellery exporters from MSME category
Increasing FDI Flows:
Cumulative Foreign Direct Investment (FDI) in diamond and gold ornaments in India
between April 2000-March 2018 stood at US$ 1.13 billion. The Government of India has
permitted 100 per cent FDI in the sector through the automatic route. In December 2016,
The International Institute of Diamond Grading and Research (IIDGR) has invested US$ 5
million for expanding its synthetic diamond testing facility in Surat

Gold on lease scheme
In July 2013, RBI which imposed a ban on gold-on-lease scheme to curb imports was
revoked in May 2014. After the revocation, only few banks were allowed to give gold on
lease.
However, in Feb 2015, it completely lifted the ban and allowed all banks to provide gold on
credit. During the same month, RBI also lifted the ban on imports of gold coins and
medallions. However, restriction on banks in selling coins and medallions are not removed.
Demonetization:
The demonetisation move is encouraging people to use plastic money, debit/ credit cards
for buying jewellery. This is good for the industry in the long run and will create more
transparency.
The government would notify a new limit for reporting about transactions in gold and
other precious metals and stones to authorities, to avoid the parking of black money in
bullion.
Gold Spot Exchange:
The Government of India’s announcement on establishing gold spot exchange could help in
India’s participation in determining gold price in the international markets
BIS Hallmarking Scheme:
The Bureau of Indian Standards (BIS) has revised the standard on gold hallmarking in India
from January 2018. The gold jewellery hallmark will now carry a BIS mark, purity in carat
and fitness as well as the unit’s identification and the jeweller’s identification mark. The
move is aimed at ensuring a quality check on gold jewellery
Gold Monetization Scheme:
Mr Arun Jaitley, Minister of Finance, Government of India, launched the Gold Monetization
Scheme in November 2015. This scheme enables individuals, trusts and mutual funds to
deposit gold with banks and earn interest on the same in return.
The designated banks accept gold deposits under the Short Term (1-3 Years) Bank Deposit
as well as Medium (5-7 years) and long (12-15 years) Term Government Deposit Schemes.
Sovereign Gold Bond Scheme:
The Government of India launched the Sovereign Gold Bond Scheme. This scheme enables
the Reserve Bank of India (RBI) to issue gold bonds denominated in grams of gold
individuals in consultation with Ministry of Finance
This scheme provides an alternative to owning physical gold. It is aimed at keeping a check
on imports of gold.

Jewellery Park:
A jewellery park worth Rs 50 crore (US$ 7.8 million) is to be set up in Mumbai by the
Government of India where local handmade workers and factories will be relocated to
develop their trade, improve their work environment and standard of living
The Gems and Jewellery Export Promotion Council (GJEPC) signed a Memorandum of
Understanding (MoU) with Maharashtra Industrial Development Corporation (MIDC) to
build India’s largest jewellery park in at Ghansoli in Navi-Mumbai on a 25 acres land with
about more than 5000 jewellery units of various sizes ranging from 500-10,000 square
feet. The overall investment of Rs 13,500 crore (US$ 2.09 billion)
Common Facility Centres:
The Government of India has inaugurated two Common Facility centres , one at Visnagar
and second one at Palanpur. Gem Jewellery Export Promotion Council (GJEPC) has plans to
open two more CFCs at Amreli and Ahmedabad. GJEPC also plans to set up a CFC at
Thrissur, Kerala. Thrissur being a major jewellery cluster it would be suitable to set up a
CFC to encourage in production and quality of manufacturing jewellery by creating
awareness to modern machines to small units in and around Thrissur. A total of 200 small
and medium manufacturers will receive access to the CFCs
80:20 Rule
In August 2013, the government made it mandatory that at least 20% of the imported gold
would be re-exported after processing (80:20 rule). For every 100 kg of gold brought into
the country, 20 kg had to be re-exported. This move was aimed at controlling the flow of
gold into the country by restricting gold imports but had failed to work, with imports
shooting up during that period. Measures such as the ban on credit purchases of gold and
the 80:20 rule had a high impact. In May 2014, RBI allowed star/premier trading houses to
import gold in accordance with the 80:20 rule. However, at the end of November 2014, the
government scrapped the 80:20 gold import rule with the intention to reduce the amount
of gold smuggling. Further, scrapping of 80:20 rule eased the supply of gold in the domestic
market and pulled down premiums. In Feb 2015, RBI further issued clarifications related to
gold imports making it clear that banks can import gold on consignment basis without
showing any end use.
Import duty doubled on cut and polished diamonds in Budget 2018
The government doubled import duty on cut & polished diamonds from 2.5% to 5% in
Budget 2018, in an attempt to protect the home industry. However, if key export
destinations reciprocate by imposing counter-import duties, exports from India may suffer.
Import duty on gold was kept unchanged at 10%. However, announcements were made in
the Budget on the government’s plan to formulate a comprehensive Gold Policy and
establish gold as an asset class. Establishment of a consumer-friendly and trade-efficient

system of regulated gold exchanges in the country was also announced. Plans to revamp
the Gold Monetization Scheme to enable opening of hassle-free gold deposit accounts were
indicated.
Marginal increase in GST rate
Few Goods and Services Tax (GST) benefits under the gems and jewellery sector is as follows:
a) Rate of duty on cut and polished colored gemstones changed from 2.5% to 5%.
b) Rate of duty on diamonds including lab grown diamonds-semi processed, half cut or broken,
non-industrial diamonds including lab-grown diamonds (other than rough diamonds), including cut
and polished diamonds changed from 2.5% to 5%.
c) Rate of duty on Imitation Jewellery changed from 15% to 20%.
Compulsory hallmarking
The government is planning to make hallmarking of gold jewellery mandatory. This

regulation, if implemented, is expected to significantly reduce the price differential
between organised and unorganised players. Currently, owing to lack of awareness among
consumers, unorganised retailers often sell non-hallmarked items with lower-than-stated
caratage. This enables them to maintain profitability despite charging lower than organised
players. Proper implementation of this rule is likely to impact profitability of unorganised
players, who will then have to raise their making charges.

Notable Trends
International gold prices highly correlated with dollar index & Fed rate
International gold prices are inversely related to the United States (US) Federal Reserve
rate and the movement of the US dollar versus other currencies (USD index).
This is because when Fed rates rise, the US securities and markets provide better
opportunities for investors to invest their money and hence the demand of the Gold is low
which leads to lower gold prices. Similarly, when Fed Rates move down or in case of geo
political tensions, Gold becomes an attractive avenue for investments that also acts as a
safe haven. Gold prices rallied from fiscals 2002 to 2012, increasing at 19% compound
annual growth rate (CAGR) owing to the dollar depreciating vis-a-vis other currencies.
When the dollar started appreciating versus other currencies post fiscal 2012, gold prices
plunged at 11% CAGR between fiscals 2013 and 2016.
Similarly, an increase in the US Fed rate induced consumers to invest in currency instead of
gold as the latter's attractiveness reduced. However, the fall in the Fed rate in fiscal 2009
shifted consumer interest to gold, which is evident from the continuous rise in gold prices.

Weak dollar, volatile geopolitical scenario boosted gold price this fiscal
International gold prices, falling continuously since fiscal 2013, touched a five-year low in
fiscal 2016. However, the prices revived post fiscal 2016. They rose a robust 9% on-year in
fiscal 2017, aided by the relatively slower US Fed rate hike, sharp drop in the British pound
following the Brexit vote, which caused a spike in the sterling, and the negative interest
rate policies in Japan and Europe.
Gold prices were down 2% on-year during the first half of fiscal 2018 owing to the strong
equity market, particularly in the US and Japan. The prices increased in the second half on
account of heightened geopolitical tensions between the US and North Korea, rising 7% in
the second half. Further, the US dollar was weak owing to systemic factors as well as the
growing strength of other major currencies such as the euro and yen. This also supported
gold prices
Increasing geopolitical tensions

Recently, the US announced tariffs on about $50 billion worth of Chinese imports. In
retaliation, China announced tariffs on about $3 billion worth of US imports. We expect this
trade war to draw investors to safe assets such as gold.
The US recently ordered the expulsion of 60 Russian diplomats, identifying them as

intelligence agents. This also prompted investors to safe haven-investment in gold.
The heightened geopolitical tension between North Korea and the US led to increased
demand for gold, boosting its price in the second half of this fiscal. The uncertainty
regarding the situation can lead to gold being seen as safe haven in the next fiscal. Further,
tensions in the Middle East, particularly between Saudi Arabia and Iran, will also lend a
safe haven status to gold.
Share of organized players increasing

Till about two decades ago, the domestic market was mostly unorganized. The industry
was dominated by small, standalone retailers, often family jewellers, with limited
marketing and advertising, who accounted for 90% of the industry. Even today, the
industry is dominated by unorganised players, but organised retailers have started to gain
market share. As of now, 30% of the market is dominated by organised players.
These organised retailers have introduced sophisticated advertising and sales campaigns,
effective inventory management systems, domestic and international brands, have better
variety and designs and have raised standards within the industry. Further, recent
regulatory changes such as GST will also likely drive market share gains for organised

players, as the tax arbitrage which used to help unorganised players has been reduced.
Further, better supply-chain efficiencies and enhanced transparency will provide an edge
to the organised players. Going forward, organised players will continue to gain market
share.
Bridal jewellery comprises 50-55% of India’s jewellery demand

Jewellery consumption in India falls under three distinct categories, namely bridal
jewellery, daily wear jewellery and fashion jewellery. Weddings play an important role in
jewellery demand in India. Indian culture strongly favors purchase of jewellery during
weddings, based on the ancient concept of ‘streedhan’ which loosely translates as property
or assets given as security to the bride at the time of marriage. An additional, although
smaller element of wedding-related jewellery demand stems from jewellery to be gifted to
the immediate families of bride and groom as well as demand from wedding guests for
their own use during weddings.
Also, given that bridal jewellery commands the maximum share in jewellery demand, it
tends to be concentrated in months considered auspicious for weddings in India. Another
key trend witnessed is that families now tend to spread out their wedding jewellery
purchases based on factors like availability of surplus income, drop in gold prices,
availability of schemes offered by jewelers etc.

Cut and polished diamond to comprise lion's share of export basket

Within the gems and jewellery space, export of cut and polished (C&P) diamonds was
muted in the first half of fiscal 2018. A 0.25% import duty on rough diamond import and
slowdown in foreign markets impacted growth. Also, realization fell 7% on-year, which led
to reduced on-year value growth. Thus, C&P diamond exports are estimated to have grown
~4% on-year as compared with 10% on-year rise in fiscal 2017. Given that the US is one of
the largest consumers of diamonds, economic growth in the US is a major driver for C&P
diamond exports from India. Improvement in C&P diamond demand will, in turn, increase
polished diamond prices. Diamond prices are expected to rise 2-3% on-year in fiscal 2019.
Miners too, looking at an improved demand scenario, are expected to increase the prices of
rough diamonds by 3-4% on-year. CRISIL Research, thus, expects C&P diamond export
revenue to increase 6-8% on-year to $25 billion in fiscal 2019
Domestic gold demand to rise 6-7%

Domestic jewellery demand is expected to continue rising in fiscal 2019, on the back of the
government’s rural focus, translating into higher rural demand and GDP growth (projected
at 7.5% for fiscal 2019 as compared with 6.6% in fiscal 2018). A sharp rise in consumption
demand is unlikely on account of higher gold prices. However, volatility in equity market
and improving income levels is also expected to lead to increased investment demand. In
all, we expect domestic gold demand to grow 6-7% in fiscal 2019.
Exports to recover in fiscal 2019

Goods and Services Tax (GST) related disruption, imposition of import duty and VAT in the
United Arab Emirates, and slowdown in foreign markets led to ~5% decline in exports in
fiscal 2018. Going forward, demand is expected to improve in key exporting destinations
such as the US and Europe, in the light of economic growth in these markets. Stabilisation
post GST and the government’s initiatives such as e-wallet facility to avoid working capital
blockage are also expected to help drive growth. CRISIL Research estimates exports to
grow 7-8% in fiscal 2019.
Profitability for the industry to decline

Higher rise in rough diamond prices as compared with polished diamond prices will lead to
contraction in margin for diamond exporters in fiscal 2019 by 20-40 basis points (bps). We
expect jewellery exporters' margins to improve by ~20 bps, on account of a rising share of
higher-margin handcrafted jewellery. On the other hand, increasing raw material (gold)
prices and selling and marketing expenses will lead to a contraction in margin for domestic
players by 30-50 bps.

Company Overview: Rajesh Exports

Rajesh Exports is a zero debt company on a standalone basis. The company emerged as a
single largest constituent of gold business in the world. Rajesh exports processes 35% of
the gold produced in the entire world. Rajesh Exports is the only Company with presence
across the value chain of gold from mining till its own retail brand.
The company is the largest refiner of gold in the world. With the recent acquisition of
Valcambi, the world’s largest gold refinery at Switzerland, Rajesh Exports has built up a
total capacity to refine 2400 tons of precious metals per annum. Valcambi is a LBMA
accredited refinery, the gold bars produced at Valcambi are good delivery bars, accepted all
the precious metal exchanges of the world and by all the Bullion Banks.
Rajesh Exports is the largest manufacturer of gold products in the world. Across its various
manufacturing facilities, it has a total installed capacity to manufacture 400 tons of world
class gold products p.a. It has set up the finest R&D facility in Switzerland and in India for
developing new designs and for evolving innovative manufacturing process for
manufacture of world class gold products.
It exports its products to various countries across the world and also supplies its products
to bullion banks, central banks, wholesale jewellery trade and retail jewellery trade.
Rajesh Exports has set up 81 retail jewellery showrooms under the brand name of SHUBH
Jewellers. Shubh Jewellers is one of the most trusted brands for household jewellery in
South India and is known for its quality, designs and value for money products.
Since inception, consistently demonstrated profitable growth and Dividend paying
Company with 100% Dividend payout for past 9 years and 27% ROCE & 21% ROE.
Gold Value Chain
Mining
 Minor presence in mining (1 Ton p.a.)
 Has contracts with world’s leading mining companies for supply of gold dore bars
(Raw Gold)
Refining
 Largest gold refiner in the world with total Precious metal refining capacity of 2,400
tons pa
 In FY17 REL refined 900 tons of gold

Bullion Manufacturing and Supply

 Produces VALCAMBI brand gold bullion which it supplies to leading bullion banks
and Central banks of the world and also manufactures bullion bars for some of the
leading bullion brands in the world (Supplied 702 tons in FY17)
Gold Products Manufacturing

 Largest manufacturer of gold jewellery and gold products in the world
 Has several manufacturing facilities, the main one being at Whitefield, Bangalore.
REL produces a wide range of Gold products (Produced 198 tons in FY17)
Exports of Gold Products

 Exports products to almost all gold markets of the world (Exported 140 tons in
FY17)
 Known worldwide for designs, quality and purity of products.
 Exports to large scale white label wholesalers
Wholesale of Gold Products Retail of Gold Products

 Wholesale presence in India and Middle East - supplies gold jewellery directly to
showroom
 Supplies jewellery to more than 5,000 showrooms in India and Middle East. (Sold 49
tons in FY17)
Retail of Gold Products

 Retail presence under own brand name “SHUBH Jewellers”
 81 showrooms in India (Sold 9 tons in FY17)
Rajesh Exports follows the same value chain and the data for the same is mentioned below.
Valcambi Acquisition
 Acquired Valcambi in 2015 for US$ 400 million
 World’s largest gold refinery & largest gold processor
 Headquartered in Balerna, Switzerland – 53 year old
 Over 200 employees and Total refining capacity – 2,000 tons of precious metals
 Debt free, consistent profitable growth & dividend paying since inception
 Contracts with leading mining companies in the world for gold dore bars (raw gold)
 Refines gold dore bars – produces 9999, 999 or 995 fineness gold bars of various
denominations – 1 gm to 12.5 kilo

Key Strengths
 Global presence across entire value chain of gold
 Lowest cost gold jewellery producer globally incurring lowest gold wastage
 High Quality Gold products accepted across markets & diverse set of customers
 Complete integration across value chain enables competitive pricing
 Extensive Global Marketing & Distribution Network
 Largest refining/ manufacturing facilities combined with strong R&D
 Professional Management with rich industry experience of over 3 decades
 Strong Balance Sheet aided by large cash reserves
Strong R&D
 R&D units located at Bangalore (India) and Balerna (Switzerland)
 Engaged in developing new designs, new processes and technology for refining and
gold jewellery manufacturing
 Instrumental in creating efficiencies and improving production in manufacturing
and gold jewellery design
 Among many other first’s, Created the first minted gold bar in the world
Expansion
- By Leveraging Valcambi
 Large volumes leading to operating efficiencies & economies of scale

 Credibility & vast marketing network to enable distribution of value added & basic
jewellery components to European manufacturers, retail & jewellery markets
 These components manufactured at low cost manufacturing facilities in India
 Distribution of Valcambi products to China & India – two of world’s largest markets
for value added small gold bars – Valcambi, Suisse well-known brand across world
 Utilize REL’s export network of wholesalers for gold scrap aggregation – raw
material for refining
- By Leveraging SHUBH Jewellers (Retail)
 Well known & respected brand in Karnataka

 Unique associate policy/franchise model – forge relationship with existing jeweller
for readymade space and established customer base
 Currently 81 retail showrooms in Karnataka
 In 1st phase of three years, plans to expand to 500 retail show rooms in 5 South
India states – highest consumption of gold in India
 2nd phase of three years – to add 1,500 retail showrooms in North, East, West &
Central India ▪ 3rd and 4th phase of three years each –add 500 showrooms in new
geographies across Asia, US & Europe
- By Leveraging Duty Free Shops
 Many Asian & European countries levy customs duty making gold bars and
jewellery expensive compared to international price of gold
 Plans to set up gold bar vending machines at Airport duty free areas
 Vending machines to dispense 999 Fineness Valcambi brand gold bars of 1-100 gms
 Price competitiveness to drive volumes and sales
 In next 3 years, plans to set up gold and diamond jewellery showrooms at Duty Free
Areas
- By Leveraging E-commerce
 Plans to set up E-commerce platform – offers 999 Fineness Valcambi brand gold
bars of 1-100 gm to retails consumers
 Working on two delivery models – one direct delivery to consumer and other
through branches of leading global banks via gold vending machines – in talks with
some of leading global bank to create delivery pointsfor gold bars ▪ In next 3 years,
Ecomm platform to host gold & diamond jewellery in phased manner
Financial Overview
For the full year FY2018, EPS increased slightly by 1.6% to Rs.42.87 vs. Rs.42.20 in FY2017.
Revenue for the year came in at Rs.1,876.9 bn, down 22.5% YoY due to the impact of
various factors during the period including the implementation of GST in India in 1Q
[ended June] FY03/2018 and the implementation of 5% VAT in Saudi Arabia and UAE in
January 2018. The company’s gross profit margin expanded by 42% during the year from
0.85% in FY2017 to 1.21% in FY2018 while operating profit margin increased from 0.72%
in FY2017 to 1.00% in FY2018, mainly due to an increase in the sales of higher margin
products. In view of the increasing margins, we revise our FY2019 earnings forecast
upwards by 3.2% from Rs.46.61 per share previously to Rs.48.10 per share, a growth of
12.2% over the FY2018 earnings. With increasing
crude oil prices and the discontinuation of VAT
on gold and other precious metals for wholesale
transactions by the UAE, we believe that demand
from the Middle-East could grow at a higher rate
and provide further boost to the company’s
earnings.

Breweries
India is the third largest market for liquor in terms of volume. The country has over 295
Distilleries scattered throughout the country with a combined annual capacity of 4,200
Million litres. Most of the licensed capacity is concentrated in three states of Uttar Pradesh,
Maharashtra, and Tamil Nadu.
As per All India Distillers’ Association (AIDA), 52% of the total alcohol produced is for
potable use i.e. for use in alcoholic beverages and balance 48% is used for industrial
purpose. Alcoholic Beverage sector can be broadly classified into four segments: Indian
Made Foreign Liquor (IMFL), Country Liquor, Wine, and Beer. Amongst these, Beer is the
largest segment in terms of volume while IMFL is the largest segment in terms of value.
The Indian liquor market is characterized by very high regulation and Government
intervention. Independent Licenses are required to produce, bottle, store, distribute or
retail all liquor products. Licenses to produce and bottle are particularly scarce and
contract manufacturing is a well-established market entry strategy. Hence, number of
players with pan-India presence is limited as well as there are high entry barriers for new
players. The industry being left out of the purview of GST.

In spite of the stringent Government regulations, partial prohibition in Kerala (the highest
consuming state), prohibition in Bihar, ban of sale of alcohol on highways (and 500 meter
radius), increase in ethanol prices, and high taxes, the industry continues to grow as a
result of increasing demand from younger population with increasing disposable income.
The industry has been estimated to be growing at around 5.5% CAGR between CY 2012-
2016. According to D & B, the market size of the Indian alcoholic beverage industry
(including branded country liquor) at around INR 632 Bn in CY 2016.
Indian alcohol consumption is skewed

towards distilled spirits. It can easily be
observed from the fact that global
demand for distilled spirits is almost 10
times that of India, while the global
demand for beer is 100 times that of
India as per CRISIL. Given the growth
prospects for India over the next few
years, there is a huge opportunity for
both domestic as well as foreign players.
On the pricing aspect, due to the
increased sale of premium products, the
average global distilled spirit price is
twice that in India. But, surprisingly,
beer price in India is higher than global
average due to higher taxation.

Market Overview
Beer
Beer which has been one of the fastest growing and prominent segments in the Indian
alcohol industry has witnessed slower growth as compared to its historical double digit
growth pattern. While double digit growth seems difficult as preference of hard liquor in
tier2/tier3 cities and rural areas leads to lower consumption of beer, urban demand
continues to remain strong.
Total consumption of Indian beer was 272 million cases in fiscal 2018, down from 287
million cases in fiscal 2017 owing to the Supreme Court's order banning sale of alcohol
within 500 meters of all national and state highways. Apart from beer produced by Indian
companies, this segment includes foreign beer brands produced by contract
manufacturers in India. Consumption of imported beer accounts for a very small
proportion of total beer consumption in India.
As consumers become more open to

trying new types of beer, players have
introduced new variants in both the
regular and premium categories.
United Breweries, for instance,
introduced 'Buzz', a flavoured ready
to drink beer which was moderately
received in the market. Our
interactions with industry sources
suggested that consumer preference
is shifting towards craft beer, which is
estimated to have clocked 20%
compound annual growth rate
(CAGR) from fiscal 2015 to 2018.
Craft beer is a type of beer brewed in a non-mechanised way, typically by microbreweries.
The mushrooming of microbreweries that brew and sell craft beer within their cafes has
helped consumers develop a taste for the same, helping it rapidly gain popularity. B9
Beverages’ Bira91, for instance, was launched in 2015 and has rapidly become a major
brand in the craft beer category, particularly in the metros. United Breweries, too, is
planning to enter the craft beer market in fiscal 2019.
HHI for beer is approximately 3300, indicating the highly concentrated market structure
(Oligopoly) within this industry. The Herfindahl Hirschmen Index (HHI) of an industry is an
indicator of the extent of competition present within the industry.
 HHI below 1000 - high competition & less concentration within the industry.
 HHI between 1000 and 1800 - moderate competition & concentration within
industry.

 HHI above 1800 - high concentration & less competition within the industry.
Beer Industry Remains a Consolidated Market
• United breweries, SAB Miller and Carlsberg together account for more than 80% market
share of the beer industry
• Increase in prices in non-regulated markets and supply shortage in regulated markets
impacted consumption pattern and caused decline in per capita consumption in the past
• Increasing acceptance of alcohol in youth and rising disposable income will result in higher
consumption going forward
IMFL
IMFL comprises brown spirits like whisky, rum, and brandy; and white spirits like gin,
vodka, and white rum. Whisky is the most popular drink among all spirits, accounting for
about 60% of the IMFL market, rum accounts for 14% of the market, brandy accounted for
23% of the market and remaining 3% were white spirits. IMFL accounts for more than
almost one-third of total liquor consumption in India (in volume terms) and has grown
rapidly over the last decade. However, with the Kerala partial prohibition,
Bihar prohibition, and highway ban law IMFL consumption has seen de-growth 1.3% CAGR
over the FY 2015-17 period. The sector benefitted from the excise cuts in Uttar Pradesh
due to which price of IMFL drinks went down in UP.
As per estimates, the IMFL industry recorded sales of 317 million cases in fiscal 2018 as
against 318 million cases in fiscal 2017.

• In an unpredictable environment, industry has shifted to high margin premium and above
brands to boost margins
• Premiumisation trend continues gradually with more launches
The Herfindahl Hirschmen Index (HHI) for IMFL is approximately 1930, indicating average
concentration within the IMFL industry. However, the concentration is less pronounced
compared with the beer segment.
Country liquor is a cheaper alternative to IMFL. The primary differences between country
liquor and IMFL are:
 Country liquor is less refined than IMFL as it undergoes fewer rounds of distillation.
 Country liquor is available more on a regional basis, while IMFL distribution
network spans across the country.
 Country liquor is a smaller contributor to state excise, as compared with IMFL
Wine
Indian wine industry is still in a nascent stage when compared to the global wine industry.
It is estimated to contribute a minute 2% to alcohol consumption in India. However, the
domestic wine consumption is witnessing a robust growth as companies and wine boards
in Karnataka and Maharashtra are undertaking various measures to promote wine
drinking culture in the country. The wine industry is at a nascent stage, with 2.5 million
cases of Indian wine consumed in fiscal 2018. Wine consumption is expected to steadily
grow to 2.9 million cases in fiscal 2019. Imported wine accounts for a very small
proportion of the total wine consumed in India. Among the different varieties, red wine
accounts for more than half of overall wine consumption. Demand for wine is largely from

cosmopolitan cities. Sula Wines and Grover Vineyards are key players. The above estimate
does not take into account India‘s consumption of illicit liquor. According to a report, more
than a fifth of the alcohol produced in the world is consumed by India and two-thirds of the
alcohol consumed is unrecorded, mainly illicit.
Sula is the largest player in the Indian wine industry. Other players are Grover Zampa,
Fratelli Wines, Big Banyan, Pernod Ricard and Charosa Winery. Together with Sula these
other players account for over 75% of the industry. However, as compared with Sula, these
players are operating at low utilization levels.

State-Wise Consumption & Regulations

Regulations play an important role in the Indian alcohol sector. Every state in India has its
own regulations with respect to distribution channels, registration, taxation and pricing of
liquor, inclusive of Indian made foreign liquor (IMFL), wine and beer.
State Government – The Complete Player

In many states, oddly, government is the distributor, retailer or both. This creates a conflict
of interest for the government as it derives revenues from the sales of alcohol, but as a
State must ensure the welfare of its subjects by curbing sale of alcohol.
Types of markets
Based on the distribution channels of alcohol in each state, markets are broadly divided
into:
 Government-controlled market (or government corporation)
 Open market or free market
 Auction market
Government-controlled market
A government corporation controls the entire distribution channel - at the wholesale level
as well as retail level. The liquor is bought by state-run agencies directly from liquor
producers at a price fixed by the state. The duration for which the prices are fixed is
typically 1 year. Some of the state corporations are Kerala State Beverages Corporation
(BEVCO), Tamil Nadu State Marketing Corporation Ltd (TASMAC) and Andhra Pradesh
Beverage Corporation. A variant to the government controlled market is the hybrid market.
Here the government controls either the wholesale or retail markets. For e.g. in Delhi,
wholesale distribution is not controlled. However, retail distribution is regulated by the
government.
Open market or free market

The government has no control over the distribution channels (both wholesaler and
retailer). Hence, prices are not regulated by the government. Instead, prices are decided by
demand-supply forces. However, the government grants licenses to distributors and
retailers at a fixed price and for a fixed period, typically one year. Through this the
government controls the number of distributors and retailers.
A free market structure allows liquor manufacturers to choose distributors within a state,
who in turn can sell to retailers at a margin. This not only removes cartelisation but also
increases the range of choice for consumers in terms of better product quality and
availability of brands. Thus, as more states liberalise their distribution network, the liquor
manufacturers stand to benefit.
Auction market
In this type of market, a state is divided into several smaller geographical regions.
Subsequently, the state government auctions the right to retail liquor in those areas for a
specific period to private entities. The highest bidder wins the right for a particular area,
following which the contractor negotiates with manufacturers to source liquor to be

supplied in the awarded area.

Drivers of Growth
Favorable Demographics
India's population is projected to grow 1.5-2% over the next five years. Currently, 65% of
the country's population is within the 15-59 year age bracket, which is the key target
market for alcohol. Going forward, the percentage of population within this age group is
expected to increase. Thus, by fiscal 2020, more individuals will become legally eligible to
consume alcohol. Greater social acceptance of alcohol will also support demand.
Shift in consumer tastes and premiumisation

In regulated markets, where government controls prices, players did not get any significant
price hikes across categories as compared to the rise in taxes. Therefore, selling lower-end
products became unviable, especially for larger players incurring high cost on selling and
distribution. Thus, to support a falling operating margin, players are focusing on premium
products. Therefore, the launch of premium and super premium products will continue
over the long term. Increased awareness of the younger generation due to better education
and a focus on quality of lifestyle supported by improved disposable income has resulted in
the gradual change in consumer preferences towards better quality products.
Elections round the corner

It has been observed that typically the sale of alcohol increases before elections. With many
state elections scheduled in fiscal 2019 and the Lok Sabha election scheduled early in fiscal
2020, the sale of alcohol is expected to see a spike.
Rise in disposable income

Robust economic growth boosts disposable income and enhances affordability, especially
for the middle class. This, in turn, drives up discretionary spending on items such as
alcoholic beverages. The per capita income has consistently increased in the past decade,
driven by economic reforms and government initiatives, the stabilization of the rupee,
narrowing of fiscal and current account deficits, and fall of commodity prices (gold and oil)
up to fiscal 2018. We estimate the 'Make in India' initiative boosted the manufacturing
sector by increasing job opportunities, leading to higher income.
Increasing social acceptance

Alcohol consumption has, of late, witnessed greater social acceptance. Also, the concept of
women drinking alcohol is increasingly being considered socially acceptable, especially in
cosmopolitan cities. Such a shift in lifestyle is expected to drive consumption.
Shift from country liquor to IMFL

Country liquor is a cheaper alternative to IMFL. The northern states (especially
Uttar Pradesh) are an important market for country liquor. However, going forward, with
the expected increase in disposable income and a superior brand perception over country
liquor, consumers are shifting towards IMFL. Typically, the sales of country liquor increase
in the year when duty on IMFL is hiked. However, in the past few years, the sales growth of
country liquor has remained tepid in spite of duty hikes and regulatory issues like the
highway liquor ban. Moreover, key players in the country liquor segment, like Globus
Spirits, have launched new brands in the IMFL segment in line with their consumers'
preferences, indicating a rapid shift towards IMFL.
Beer market potential remains untapped

India is one of the fastest-growing beer-consuming nations in the world, with sales volume
expanding at 5% compound annual growth rate from fiscals 2010 to 2017. Consumption
fell 5% in fiscal 2018 owing to the highway liquor ban. However, India has one of the
world's lowest numbers for per capita consumption of beer. Both emerging and BRICS
(Brazil, Russia, India, China, and South Africa) nations have much higher per capita
consumption levels. India is a potential healthy-growth market for beer, encouraging
foreign brewers such as Anheuser-Busch, Carlsberg, and Heineken to enter the space.
Challenges for the Breweries Sector

Increased Prohibition and Other Adverse Regulations
Though there is a lot of potential for growth in India, the breweries segment faces a lot of
regulatory hurdles. Right from the drinking age to selling, the industry faces many
regulations including inability to advertise. This poses a huge problem for the industry.
The legal drinking age varies from state to state, while the ban on direct advertising of
alcohol makes it difficult for companies to promote their products. This also discourages
new players from entering the market as they find it difficult to market their product in the
country. The primary challenge for the breweries sector is the regulation in distribution. In
states like Tamil Nadu, Uttar Pradesh and Kerala, wine shops are all licensed shops owned
by the government. The regulations are relaxed a little in states like Karnataka and Andhra
Pradesh where liquor is now sold in supermarkets and hypermarkets. The prices are
usually fixed by the government allowing little flexibility for the companies to raise or
decrease the prices based on demand.

Due to the heavy regulations, the companies have to rely a lot on government policies
regarding alcohol, which makes it challenging to the industry. Recently, the Kerala
government has taken an initiative to have complete prohibition by 2024. This was
primarily due to the high per capita alcohol consumption (about 8.5 litres according to
Times of India) in the state. Though many argue that the state might not be able to
successfully implement prohibition as about 20% of its revenues are derived from alcohol
sales and expectations are that 100,000 people might lose their livelihoods. In Kerala
around 418 bars remained closed for most of 2014-15 as part of a phase wise drive to ban
IMFL, impacting IMFL consumption which declined by 8 per cent y-o-y. Also, the state
government closed about 30 IMFL retail outlets out of 330 outlets. Nevertheless, such
adverse legislations could impact the operations of many players in the industry and
hamper expected growth in India.
Liquor a major source of tax revenue for states

In India, alcohol is taxed by the state government and each state has a different tax
structure. Many states depend heavily on liquor as a source of tax revenue. Hence, the
excise duties and other taxes on the manufacture and sale of alcohol are frequently
increased, albeit at a low rate. Since a very sharp increase in taxes impacts demand and tax
revenue, any abnormal increase in taxes is unlikely on a regular basis.
Tax is collected from the liquor business stakeholders in the form of excise duty, sales tax,
license fee, import fee, export fee, and label registration fee. While excise duty accounts for
the largest share in taxes on liquor, in some states, sales tax is the largest tax component.
Impact of GST
Prices of beer, wine and hard liquor will go up by a few rupees a bottle for consumers due
to the goods and services tax (GST), and even that increase will not happen immediately,
according to industry executives.
From the companies’ perspective, the bigger hit will be on cheaper brands that operate on
thinner margins than mid-market and premium brands as higher input taxes under the
Goods and Services Tax (GST) regime erode their profitability.
Even that impact is not expected to last too long, and liquor firms expect the industry to
stabilize in six to eight months, especially once the increase in cost is passed on to the end
consumer.
Input Cost
Alcohol for human use has been kept out of GST but raw materials and packaging products
are included in the new tax. That means liquor firms will incur higher costs but won’t be
eligible for output credit. Since they are not eligible for credit, they won’t be able to offset
the cost increase like other sectors.

Those new tax rates will push up production costs for liquor firms by between Rs25-40 a
case on average, according to several executives. That will only mean an increase of, for
instance, a rupee or two at retail outlets for a 180 ml bottle of an economy brand for the
consumer. Hence, a price hike will not mean a dip in sales volumes.
Those few rupees will make a huge difference for companies, though, since they are looking
to recover the increase in costs from consumers. The catch is liquor firms have to approach
state governments, which handle the distribution of alcoholic beverages in nearly 65% of
the country, with requests to increase prices and wait for approval.
If state governments increase prices for liquor firms by between Rs50 and Rs70 per case,
that should help offset the rise in costs.
The industry had taken a lot of hits in the past year as a result of demonetization and the
highway ban. State governments had also taken a hit in their revenue collection.
Prices that have been steady in recent years will definitely increase next year. But if
governments do not increase prices, companies—especially those that are more dependent
on economy or value brands—will be forced to come up with ideas to cut costs in order to
improve margins, the executive cited above added.
Still, as with many other sectors, it is still too early to quantify the actual impact, according
to some liquor firms. Any big, drastic change in the tax structure takes time for people to
understand what the actual implications could be.
Liquor has been kept outside the goods and services tax (GST) for now as it requires a
Constitutional amendment to bring it under the ambit of the new tax regime.
However, there are expectations that the decision can impact the sector negatively.
Secondly, the industry operates with second-hand bottles. Under the current tax regime,
second hand bottles are not subject to excise duty, because they do not pass through
factory gates, second, third, fourth, fifth time, they only incur local sales tax. Now, this is an
issue the industry is still discussing with the GST Council.

IMFL
Demand remained subdued in fiscal 2018; growth expected to pick up in fiscal 2019
Highway liquor ban and other regulatory issues affected demand in fiscal 2018
 Sales in first quarter plunged 10% on-year owing to liquor ban.

 Maharashtra and Kerala among the worst affected owing to a higher number of
highways in the two states and delay in the de-notification of state highways.
 Sales picked up in the second half of the fiscal as the Supreme Court allowed liquor
vends located along highways that pass through city limits (municipal corporation
limits) to remain open
 Hence, demand for IMFL in fiscal 2018 was range bound at 317-318 million cases as
against 317 million cases in fiscal 2017
Consumption expected to pick up in fiscal 2019

 An improving regulatory environment negates the announcement of duty hikes in
key consuming states of Karnataka and Maharashtra. Providing support is the
waning effect of the highway ban
 Rise in the drinking population, growing acceptance in society with regards to
alcohol consumption, and a gradual shift to IMFL from country liquor will support
consumption in the long term
Raw material costs expected to fall in fiscal 2019

 With the molasses prices tumbling, ENA prices too are expected to fall further in
fiscal 2019
 Although ENA prices have been constantly rising, molasses prices have followed a
flattish trajectory.
 High sugarcane production lead to a fall in molasses and ENA prices in fiscal 2017
and 2018

Operating margins to expand owing to lower raw material cost
 Shift from lower-priced 'regular and below' to 'prestige and above' brands in the
next two fiscals and further increase realization on a per case basis to supported
margin expansion
 Packaging cost is expected to rise only marginally as the GST rates would be
applicable for the whole fiscal year as against 9 months in the previous fiscal
Beer
Beer market to gradually recover from highway ban in fiscal 2019
Beer demand to grow by 6-7% in fiscal 2019

 Pent-up demand from the past two years as sales were sluggish due to
demonetisation and highway liquor ban
 Pre-election sales expected in fiscal 2019 as Lok Sabha elections are lined up in
early fiscal 2020
 Fear of liquor ban in Tamil Nadu, which may result in panic buying`
Better economic conditions and greater social acceptance

 Low prices will tip the market in favour of beer, enabling faster growth vis-à-vis
IMFL. Additionally, recent launches of new brands will support growth
Operating margins to expand in fiscal 2019

 In fiscal 2019, operating margin is expected to expand
 Price increase and lower raw material cost are expected to lead to a margin
improvement
 To offset the price increase in new bottle prices, players have increased the use of
old bottles, thus keeping packaging costs stable
Wine
The newer wine brands are slowly gaining market share with launch of new flavors;
Sula still remains the largest player with 55-60% market share
•After falling in fiscal 2017, wine consumption picked up in fiscal 2018. Wine
consumption to accelerate to 2.9 million cases in fiscal 2019
-Demand was impacted in the first quarter of fiscal 2018 because of the highway ban.
Growth picked up in the latter half on a low base in the previous demonetisation year
-Wine demand is expected to accelerate in the following years driven by:
-Changing lifestyle, especially in cosmopolitan cities; increasing acceptance of wine as a
lifestyle drink
-Government’s increased focus on tourism, evolving palate of consumers
-Various sales restrictions on IMFL and beer

Company Overview: United Spirits

About the Company
United Spirits, since the past five
years, works under Diageo which is a
global leader in beverage alcohol,
with an outstanding collection of
brands across spirits and beer.
Diageo’s products are sold in more
than 180 countries around the world.
The brands include Johnnie Walker,
Crown Royal, JεB, Buchanan’s and
Windsor whiskies; Smirnoff, Ciroc
and Ketel One vodkas; Captain
Morgan; Baileys; Don Julio;
Tanqueray and Guinness.
USL’s performance ambition is to be the best performing, most trusted and respected
consumer products company in the world. USL is committed to tackling alcohol misuse and
believes that when consumed in moderation and responsibly alcohol can be a part of a
balanced lifestyle. This philosophy is central to Diageo’s purpose to celebrate life every day,
everywhere.
It is delightful that they have

achieved this despite multiple
challenges faced by India’s
beverage alcohol industry. The
Supreme Court’s highway ban,
GST implementation and the
uncertainty caused by route to
market changes in certain
states this year, disrupted the
industry. However, these big
changes are now left behind, ushering in what USL believes will be a more stable
environment next year. The rigid limitations on pricing freedom of their products across
most States continues to be a dampener on their performance even though USL seeks to
mitigate the challenge by judicious cost control.
Despite several regulatory challenges impacting the industry last year, USL posted
improvement in performance, underlined by growth in net sales after adjusting for
operating model changes. USL delivered a significant enhancement of Gross Margins, made
possible through mitigation of the GST risk through policy advocacy, a relentless focus on
productivity and realization of headline pricing.

FY18 saw stabilization of changes in operating model and route to market
FY18 began with implementation of the GST era,

which led to some hiccups for the liquor
industry. The year also saw price hikes for USL
across several states. Also, USL entered into
agreements with various distilleries on a fixed
fee basis to manufacture its popular brands for
three to five years. The shift in business model
resulted in sustainability in gross margins. The
company saw one of the largest market i.e. Uttar
Pradesh (UP) distribution model slowly
transitioning from a closed to a free market,
which led to an initial surge in volumes (mainly
channel filling) and later stabilized to sustainable volumes. USL would continue to invest in
future while strengthening its investments in brand building (A&P). Given the experience
of working across distribution models coupled with strong consumer patronage, USL is
expected to benefit from a formalization of the sector.
Carry forward impact of price hikes to aid FY19 revenue/margin
The company has been able to get price hikes in 15 states in FY18 and expects carry
forward impact of price hikes to positively impact margin in FY19. Also, it is negotiating
with some other states to also allow price hikes in FY19E. Further, USL’s journey of
premiumisation is on course with 65% of revenues being contributed by prestige and
above segment. The cumulative benefit of above factors would accrue over FY19 and FY20
with revenue and EBITDA CAGR of 14% and 13%, respectively.
On track to achieve growth in revenue/margins over long term

FY19 has begun with a glimpse of stronger
volume growth in the prestige and above
segment and gross margins of 49%.
However, concerns remain on
stabilisation of popular segment, post
changes in the operating model that is
now expected to take a quarter or two.
The company is getting future ready by
cutting down on inefficient manufacturing
plants (reduced to 50 from 94 plants three
years ago) and planning a greater push
towards building stronger brand and
digital outreach (acquisition of Hipbar).
The premiumisation focus and

maintaining leadership in popular brands with consecutive price hikes across states has led
margins to trend higher. The strategy would position USL to achieve its guidance of
achieving double digit growth and high teen margins.
Major Developments
 The management has indicated that Q1FY19 was a stable quarter for the liquor
business. Prestige and above segment comprise nearly two-third (~65%) of overall
net sales
 The prestige and above segment volumes is expected to grow in double digits
whereas the popular segment is expected to grow in low single digits
 The management has maintained its guidance of double digit revenue growth and
mid to high teen EBITDA margins for FY19
 The company has bought a 26% stake in Hipbar, which now primarily operates in
Bangalore and Chennai and is involved in providing wallet services and accessibility
to liquor beverages. The management expects the digital economy to provide a
further cost effective push to the liquor industry
 The management expects the route to market (RTM) environment to be stable
ahead. The initial surge was seen in Uttar Pradesh (UP) as it was becoming more of
an open market for the liquor companies. It has now softened and is more
sustainable
 The management has indicated that it will offer no more franchisees for the popular
segment
 Net of royalty, the company earned ~| 74 crore from sales via franchise The
advertisement expenses are expected to be range bound in 9-10% in the near term
 The management is shutting down inefficient manufacturing plants and, thus,
expects to incur restructuring costs in the P&L for a year or two

Unnati - FMCG, Consumer Durable, Retail, Brewery - 2018

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UNNATI INVESTMENT MANAGEMENT AND RESEARCH GROUP

Khushi Desai | Arihant Jain

Unnati Sector Report 2018-19 | 1

Consumer Durables Market Overview.................................................................................................... 44

Unnati Sector Report 2018-19 | 2

Gems and Jewellery ................................................................................................................................... 99

Unnati Sector Report 2018-19 | 3

Unnati Sector Report 2018-19 | 4

Recent GDP Trends

Demand side analysis

Unnati Sector Report 2018-19 | 5

Trade and Investment

Unnati Sector Report 2018-19 | 6

Unnati Sector Report 2018-19 | 7

Trends in FMCG revenues over the years

Unnati Sector Report 2018-19 | 8

70 (%) 35 (%) 95 (million)

22 (million) 150-200 (million) 1.7 (x) 180 (US$ 180 billion)

Source: Luxurydaily, Livemint, BCG, Business standard

Unnati Sector Report 2018-19 | 9

 Dairy Products  OTC products and  Soaps & Detergents

MARKET PENETRATION (IN %)

Source: Joint report by CII and Boston Consulting Group

Food & Beverages

Segment Categories Some key players in India

Ambient ready meals and dried ready

Chocolate, Gum and Sugar Mondelez, Mars International, Parle

Milk, Butter, Cheese, Yogurt, Dairy-

Unnati Sector Report 2018-19 | 11

1. Affluence of working population with increase in disposable income

Increasing awareness about the cost-effectiveness of self-medication and OTC medicines is

Unnati Sector Report 2018-19 | 12

Market Market Current Key

Source: Business Wire

Unnati Sector Report 2018-19 | 13

Home & Personal Care

Unnati Sector Report 2018-19 | 14

 HIGH – Presence of multiple

Supplier Power Competitive Rivalry Buyer Power

 HIGH – Private label brands  HIGH – Low switching cost

Threat of New Entrants

Unnati Sector Report 2018-19 | 15

PEST Analysis of Indian FMCG Industry

Unnati Sector Report 2018-19 | 16

SWOT Analysis of Indian FMCG Industry

Unnati Sector Report 2018-19 | 17

Porter’s Value Chain of FMCG Industry

Administrative, Legal, accounting, financial management

Human Resources Personnel, by recruitment, training, staff planning etc.

Product and Product and process design, production

Value Added less Cost = Profit Margin

Procurement Supplier management, funding, sub-contracting,

INBOUND OPERATION OUTBOUND SALES & SERVICING

Quality Packaging, Finishing Customer Maintenance,

Unnati Sector Report 2018-19 | 18

FMCG distribution Network

SUPER STOCKIST STOCKIST CO. OP STORES

WHOLE RETAILER WHOLESALER RETAILER

Unnati Sector Report 2018-19 | 19

Consumer Lifestyle Trends

Unnati Sector Report 2018-19 | 20

Shifting Family Structures