DEMAND DRIVERS FOR SLECTED CATEGORIES

Rising commodity prices for necessities su as dairy products, vegetables and pulses was one of the main factors which drive overall value sales in grocery in retailing in India.

DAIRY:
Supply View: India, with its vast expanses of arable land, has plenty of room for dairy farming. It has a national herd of dairy cows of more than 38mn head and is the world's largest producer of raw milk. We foresee output growth to continue expanding strongly following growth of 27.7% from 2004 to 2009. We have revised up our estimate for milk production in 2009 to 110.00mn tonnes following a release from the National Dairy Development Board. We have also raised up our forecast for 2010 production as above average rains in the final quarter of 2009 have improved pasture conditions. We now forecast production to rise 3.7% year-on-year (y-o-y) to 114.02mn tonnes. Over our forecast period to 2014, we expect production to grow to rise by 25.9% to138.45mn tonnes. We also expect production of value added dairy products to grow in response to rising disposable incomes, with butter production forecast to see growth of 39.6% to 2014. Demand View: The ubiquity of cattle in India makes milk a major consumption staple, particularly as rural inhabitants generally own at least one cow. Fluid milk consumption in 2008 was an estimated 44.74mn tonnes. To 2014, it is forecasted this to expand by 26.5% to 56.58mn tonnes. Growing per capita incomes will fuel increased demand for high-value dairy products, such as yoghurt, cheese and butter. Foreign investors and multinational firms such as Danone can provide the marketing and packaging expertise

to bring milk drinks and processed cheeses to the masses. India is now among the world's largest and fastest growing markets for milk and milk products, with market size in value terms, including the organized and unorganised sector, at US$47.6bn, growing at nearly 7.5% annually. The demand for value added dairy products, such as cheese, dahi (Indian yoghurt) and probiotic drinks is increasing at a double digit rate. At present, India seems to be selfsufficient in milk and milk products. However, given that demand is growing faster than supply, there could be serious issues with respect to self-sufficiency in the near future. Any increase in milk production is dependent on the farm gate price received by producers. Farm gate prices have increased by more than 50% in the last three years. India has an insignificant share of the global dairy trade, less than 1%, despite being a leading producer of milk. Most of the packed liquid-milk segment in India is dominated by the co-operatives. The liquid milk contribution to total revenues of dairy cooperatives ranges from around 60% to 80%. Private players, barring few, are mainly focused on milk products other than packed liquid milk. There is huge potential for processing and value addition in the organised sector, particularly in ethnic Indian sweets, which are largely sold in unbranded form at markets. The key differences between the organized and the unorganised sectors concern the level of investment in preserving the quality of milk, the technology used for processing and the compliance with food standards. SUGAR: Supply View: Sugar production capacity in India has increased dramatically since the turn of the century. Indian plantation white sugar is renowned for its high quality.

Production in 2007/08, however, fell 7.0% year-on-year (y-o-y) to 28.63mn tonnes. This fall continued in 2009 as poor weather delayed the start of the crushing season by several weeks. This situation was exacerbated by a dispute between millers and the state government in Uttar Pradesh, one of the major sugar producing states, over how much they would have to pay cane growers for their produce. This situation has now been made even worse by dry weather in Maharashtra and pest attacks in Uttar Pradesh reducing cane yields as well as poor recovery rates. Many mills have been forced to close or severely reduce output owing to lack of cane. Despite an increase in the amount paid to farmers for cane, by September 2009 the area of cane planted for the 2009/10 sugar crop was down 2.9% y-o-y as production was disrupted by the poor weather conditions and we forecast a terrible year for sugar production. We have revised down our forecast for production owing to reported lower than expected sugar content in cane. It will be 2010/11, however, before sugar production returns toward the 2008 level. Production then will be helped by the high prices farmers are receiving for cane in the current season. Demand View: It is forecasted Indian sugar demand to increase by 19.3% over the three-year forecast period, with consumption projected at 28.87mn tonnes in 2014. The majority of this growth is attributed to robust demand for confectionery and soft drinks. It is forecasted volume sales of confectionery to rise 30.1% to 2014 while the volume of soft drink sales will rise 51.0%. The predominant use of Indian sugar is for human consumption, in contrast to the world's largest producer Brazil, where it is estimated that 57% of cane is used for ethanol production. GRAINS:

Supply View: Indian grain production goes almost entirely to meeting domestic demand. Corn production is expected to show the greatest gains over our forecast period, growing by 26.8% from its 2009 level to reach 24.46mn tonnes by the end of 2014, driven mainly by increasing demand from the livestock sector. Wheat production in 2008/09 came in at a record 80.58mn tonnes, an increase on our previous estimate owing to better than expected yields. For 2009/10, we have revised up our production forecast for wheat owing to good rains in the final quarter of 2009. We now forecast production to grow 0.5% year-on-year (y-o-y). We expect growth in wheat production of 6.5% over our five-year forecast period to 2014 as production responds to population growth-led demand. Sorghum is projected to see robust growth as an alternative to wheat and a hardier crop to cultivate during the climatic extremes of monsoons and droughts, although with 9.05mn tonnes predicted for 2014, production will remain minor compared to the aforementioned grains. In 2009, we had expected production of both sorghum and corn to be down as poor rainfall led to large reductions in the kharif winter harvested crop. According to the Agricultural Statistics Division, kharif production was down 24.6% y-o-y for sorghum and 8.0% y-o-y for corn. Estimates show that full-year sorghum production, as expected, fell, dropping 7.8% y-o-y to 7.31mn tonnes. Contrary to our previous expectation, full-year corn production actually rose, growing 1.7% y-o-y to 19.29mn tonnes. This was due to a larger than anticipated rabi harvest, up 40% y-o-y owing to high yields. For the 2010 kharif crops of both corn and sorghum, the area planted was slightly up on a year-on-year basis. Despite this, we expect corn output to fall as yields are hit by the dry conditions. Sorghum output should, however, increase.

Demand View: Wheat is one of India's staple consumption grains. We forecast consumption growth, at 15.7% to 2014, to outpace population growth over the same period as rising incomes allow consumers to spend more on food. Growth in consumption will be aided by the increase in interest in Western bakery goods in the cities and by the spread of wheat consumption throughout the country from its traditional base in more northern states. In 2010, we expect wheat consumption to see strong growth following the fall in consumption in 2009. Demand will be boosted by the shortage of rice, for which the price is expected to rise next year. RICE: Supply View: India is a massive rice producer, second only to China. In 2008 the government started buying stocks early as it looked to be a poor harvest. In the end production for harvesting year 2007/08 came in at 96.69mn tonnes, a 3.6% year-on-year (y-o-y) expansion. We feel that better access to pesticides and fertilisers will play a role in improving crop yields and boosting production 22.3% from 2009 to 2014 to reach 121.27mn tonnes. This would put India on target to meet the government's aim of annual rice production of 140mn tonnes by 2025. In 2008/09 production is estimated to have grown 2.5% y-o-y to a record 99.15mn tonnes on the back of good weather conditions. In 2009/10, we now expect production to fall sharply owing to a decline in yields and a fall in the area planted. Poor rains have severely disrupted sowing and the area planted for the main kharif crop is well down. The government in its first advance estimate released in December put the kharif crop at 71.65mn tonnes, down 15.3%. This is somewhat better than expected owing to the good rains in the final quarter of 2009. We have revised up our forecast to reflect this.

We now forecast production to fall 14.4% y-o-y to 84.84mn tonnes, up from a previous forecast of 82.66mn tonnes. Demand View: Rice is the staple food for the majority of the population and the government works to ensure that the whole population has access to enough. As such, the crop is bought in bulk by the Food Corporation of India (FCI) and sold at subsidised rates. In light of this, we believe that rice consumption will be relatively inelastic to GDP and likely to closer reflect population expansion. Despite this, in 2010, tight supplies and rising prices will see consumption fall. Rice prices, along with the price of other staple foods rose rapidly in the final months of 2009. By mid-December, the Ministry of Commerce and Industry's index of food prices was up by almost 20% y-o-y. Consumption should recover in 2011 as production returns to a more normal level. To 2014, we forecast rice consumption to increase by 10.1% to 2014 to 102.55mn tonnes. In the longer term, we expect per capita rice consumption to fall as rising incomes allow Indian consumers to vary their diets more and eat more high-protein foods such as meat and dairy. As a massive rice producer, India has the potential to be the world's largest exporter. At present, domestic consumption absorbs the vast majority of output. Over the past five years, surplus production has been around 3mn to 6mn tonnes. We expect this to increase over our forecast period as production growth outpaces growth in consumption. In 2010, however, the fall in production will leave India with a large deficit, which will be covered by domestic stocks.

POULTRY:

Supply view: It is forecasted poultry production to expand by 40.7% to 2014 to reach 3.59mn tonnes from its 2009 level of 2.55mn tonnes. All of this extra production will be destined for the domestic market as demand for meat rises along with incomes. The slaughter of cattle is taboo among many of India's 80% Hindu population, yet analysts forsee robust expansion of 28.8% to 3.43mn tonnes in 2014 reflecting the rising prevalence of buffalo meat consumption. Demand View: Buffalo meat is becoming more popular in India as a source of protein, particularly as it is now cheaper locally than some pulses. We forecast consumption to grow by 28.2% to 2014 to reflect this dynamic, while poultry consumption is projected to absorb the whole of domestic production, growing 40.7% over the forecast period. This growth will be driven by rising incomes allowing Indian consumers to increase their intake of high-protein food such as meat. Increasing interest in Western-style fast food will also contribute to robust growth in meat consumption. In December Yum! Brands said it hopes to increase the number of its KFC fried chicken outlets in India to 500 by 2014 from its current 72. Other international brands as well as local imitators are sure to follow.

EDIBLE OIL India is fortunate in having a wide range of oilseeds crops grown in its Different agro climate zones. Groundnuts, mustard/rapeseed, sesame, safflower, linseed, Niger seed/ castor are the major traditionally oilseeds. Soya been and sunflower have also assumed importance in recent years. Coconut is most important amongst the plantation crops. Efforts are being made to grow oil palm in Andhra Pradesh, Karnataka, Tamil Nadu in addition to Kerala and Andaman and Nicobar Islands. Among the non-conventional oils, rice bran oil and cottonseed oil are the most important. In additional, oilseeds of tree and forest origin, which grow mostly in tribal inhabited areas, are also a significant source of oils. Problem: India consumes approximately 10 million tonnes of oil a year. It has the worlds fourth largest edible oil economy. Yet, about 43 per cent of edible oil available in India is imported. Displacing China, India has been ranked as the worlds largest importer of edible oils since 1999. SPICES: The important spices produced in India are black pepper, cardamom, ginger, turmeric, chilly, garlic, coriander, cumin, fennel, fenugreek, celery, clove, nutmeg, cinnamon, tamarind, kokum, garcinia, curry leaf, saffron, vanilla and mint. The south Indian foods are popular for their non steaming spices such as cinnamon, cardamom, ginger, clove garlic, cumin, coriander and turmeric. With an increasing awareness of brands, consumers are moving towards various brands of spices and its products in India. Leading brands of spices and its products in Delhi are MTR, MDH, Badshah, Everest, Swastik etc. all the leading brands have a constant and steadily maintained quality and uniqueness which attract consumers to use them repeatedly and creating a brand loyalty. Recent developments in this sector are brought by prominent multifarious players like ITC entering with its Aashirwad brand, introduction of organically grown spices by the existing big brands in market.

Wholesaling of branded spices is generally carried out through dealers or distributors. Discussion with the convenient sampled wholesalers resulted in following findings: Products are seldom pushed into the retail chain. It is a pull based selling chain though higher margins play an important role in influencing the retailers. Usually wholesalers margin is calculated on billing price. Computerized and standard packing, reputation, well maintained quality and good terms of trade are the factors that they look for in a new entrant.

Table: Sales By Format -- Historical Data And Forecasts

2005 2006 57.37 10.17 12.98 2007 74.58 25.43 18.17 2008 93.22 50.86 25.44 2009 106.51 61.08 29.40 2010 124.43 74.75 34.63 2011 144.76 90.29 40.36 2012f 166.78 107.47 47.08 2013f 191.63 126.87 54.63 2014f 219.22 148.40 63.03

Supermarkets (INRbn) Hypermarkets (INRbn) Discount stores (INRbn) Convenience stores (INRbn) Total mass grocery retail sector (INRbn)

44.13 4.07 9.27

9.17

11.92

15.50

20.15

23.17

26.94

31.24

35.99

41.36

47.31

66.64

92.45

133.69

189.68

220.16

260.76

306.66

357.32

414.49

477.96

Forecasted demand for Commodities

600 500 400 300 200 100 0 2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f