IIM Shillong Niveshak Aug 2011 by Zigu MBA

3rd Anniversary Edition

Niveshak THE INVESTOR

VOLUME 4 ISSUE 8

Sector Reports Special

August 2011

IT Telecom Banking Pharmaceutical Power Automobile FMCG Telecom

F r o m E d i t o r ’ s De s k Dear Student Managers,

Niveshak Volume IV ISSUE VIII August 2011 Faculty Mentor Prof. N. Sivasankaran

The Team Editor Rajat Sethia Sub-Editors Alok Agrawal Deep Mehta Jayant Kejriwal Mrityunjay Choudhary Sawan Singamsetty Shashank Jain Tejas Vijay Pradhan Creative Team Vishal Goel Vivek Priyadarshi

All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com

First and foremost it is indeed my pleasure to say that I am a regular reader of Niveshak. I am very glad to note that the age of Niveshak is three. The current issue documented about the analysis of various Indian industries. Post economic reforms in 1991 India have come a long way, moving from the growth rate of five per cent to seven to nine per cent range. This growth has been attributable to the structurally driven economic reforms, entrepreneurial activities and linkages to the global economic activities. Factors like young population, growing middle class, rising income levels with stable and growing household savings make India’s medium to longterm growth assured. I strongly believe that India’s real GDP will grow at a CAGR of little over 9% during the forthcoming decade and thus translating Indian economy into world leader by giving a tough competition to other emerging economies like China. This is going to happen and we all are going to be witness for the same. In this juncture I would like to record the consistent support provide by our director Prof. Ashoke Kumar Dutta in all our activities. My special thanks also due to the faculty mentor of Niveshak Prof.N.Sivasankaran. My heartfelt congratulations to the Team Niveshak for making the special third anniversary issue.

P. Saravanan (Faculty Mentor)

Dear Readers,

At the outset, I take immense pleasure to pen this letter for the third anniversary issue of NIVESHAK, the monthly finance magazine of IIM-Shillong. This is the time for all of us in the Editorial board to look 12 months backward and take count of the great journey which made us to see this issue in your mind space. Months have run; innovations were introduced; subscribers have come more in numbers; power of knowledge got compounded issue after issue; economic cycles got up and down; stock indices had long and short jumps; climate has changed between summer and winter; old batch has gone and new batch has come;2011 has replaced 2010 in our schedules, but the only thing that remains always with our editorial team is their never give up commitment to add something more in issue after issue- in a world where 24/7 is not enough, our editors have made their noble efforts in presenting you with interesting and information content such as Class Room, Quizzes, Articles, Interviews, Industry Analysis and so on.. Hats off to the editors on board for their greatest efforts without which NIVESHAK would not have entered your “FINSENSE” I take this opportunity to place record of our sincere thanks to Prof.Ashoke K. Dutta, our beloved director for his inspiration and support in publishing NIVESHAK on a regular basis. I am sure that the ROTI [Return on Time Invested] for you would have been higher for your investment of time in NIVESHAK. “Thanks” is a very small word for all of you for having chosen us as your knowledge collaborator in your managerial magic. We request you to continue your support to us through contributing articles and feedback regularly to NIVESHAK besides supporting us by subscribing it. Let me end by quoting “Life is always a trade-off between what we have and what we wish to have” Wishing you happy reading….

N.Sivasankaran (Faculty Mentor)

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

C O N T E N TS Niveshak Times

Sectoview

04 The Year That Was

He Speaketh

10 Mr. Sunil Mitra Finance Secretary, , Ministry of Finance

13 Mr. Utkarsh Majmudar

Vice-President, Global Research , HSBC Bangalore

20 Information Technology 26 Pharmaceuticals

Sectoview He Speaketh

30 Banking 34 Automobile 38 Telecom 42 FMCG 46 Power 51 Telecom

14 Mr. Jean Imbs

Professor, Paris School of Economics

16 Mr. B.R. Tripathi Chief Commissioner, Central Excise & Service Tax Department

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www.iims-niveshak.com

The Niveshak Times Team NIVESHAK

IIM, Shillong

Exemption of 25% Public Float Norm on PSUs The directive issued by Finance ministry last year in August has exempted state-owned firms from the recent rule that requires listed companies to achieve at least 25% public holding within three years after some of them said they will not participate in disinvestment if the rule was forced on them. Public sector firms will now have to maintain a minimum public float of only 10. The modified rules also gave a breather to the private sector companies. They will have to comply with the minimum 25% public float within three years but they will now have flexibility in how the limit is reached, without the annual 5% increase mandated in the current rules. India now a part of FATF team India has become the 34th member of Financial Action Task Force (FATF), an intergovernmental organization dealing with policy formulation on internationally sensitive financial issues such as money laundering and terrorist financing. The induction of India in this international standard setting body will have far reaching ramifications both for global capital operating in India, and the ability of Indian firms to undertake exports of financial services. India would be benefited by being a part of FATF by providing the comprehensive toolkit for law enforcement agencies to be able to track the money behind terrorist attacks, both within India and from other countries. Another dimension lies in the country emerging as an exporter of financial services. Singapore Mercantile Exchange set in operation Singapore Mercantile Exchange (SMX), a commodity and currency bourse was launched last year in September. The launch of exchange is the first major international exchange business initiative by an Indian entity. The founder of this exchange is Mumbai based Financial Technologies group. The exchange provides a comprehensive platform for trading a diversified basket of commodities like gold, crude oil, precious metals, future and op-

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tions contracts and Euro-US dollar. Burger King acquired by 3G Capital US’s second largest restaurant chain, Burger King has been acquired by New York based valueoriented investment vehicle, 3G for $4 billion. As a part of the deal finalized in the first week of September, 2010 Burger king has been offered $24 per share. Burger King, which trails only McDonald’s Corp. in the U.S., underwent a slower recovery than its larger rival as its clientele suffered more from the recession. Investment firms TPG Capital, Bain Capital and Goldman Sachs Capital Partners bought Burger King in 2002 for about $1.5 billion from the spirits major Diageo PLC, but entered the capital markets in 2006.Post the Burger King’s deal with 3G, the private equity firms still held 31 per cent stake in the company. World’s largest diamond exchange comes up in Mumbai Bharat Diamond Bourse (BDB), the world’s largest diamond exchange started trading in October last year. The bourse located in Mumbai’s business hub, Bandra-Kurla Complex marks the transition of India from a diamond manufacturing centre to a trading hub. The exchange is equipped with the necessary infrastructure facilities promotion of diamond, diamond jewellery from country and provision of support services for traders, importers, exporters and other stakeholders. Suresh Gurmani removed from position of SKS Microfinance’s CEO Three months after its successful IPO in India, SKS Microfinance underwent a major leadership change with the firing of its CEO, Suresh Gurmani. The position has been taken up by his deputy M

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R Rao. The company’s share saw a dip of 6% in their price to Rs.1277 on the day Board of Directors came out with its decision. The company did not provide any reasons for termination in its notification to stock exchange. However pressure from regulators SEBI and RBI has forced company founder, Vikram Akula into citing interpersonal issues within the senior management as the reason behind this drastic decision. But the founder denied any power tussle between him and Gurmani saying that the changing market scenario demanded a more seasoned person at the helm of company affairs. SEBI raises retail investor cap to Rs. 2 lakhs SEBI has doubled the upper limit for retail investment in public offers from Rs. 1 lakhs to Rs. 2 lakhs to encourage greater investor participation in share market through retail route. Now an investor applying for shares up to Rs. 2 lakhs in an IPO or FPO will be treated as retail investor which will make him/her eligible for 5% discount on subscription’s face value. It is relatively easier to buy shares through retail investment due to relatively lower share subscription by this category as compared to HNI and institutional investor community. The total shares at the disposal of retail investors shares in a public offer has remained unchanged at 35% and the corresponding allotments for HNI and institutional investors has also remain fixed at 15% and 50% respectively. Now quarterly disclosure of Assets by Mutual funds Association of Mutual Funds in India (AMFI) has decided to end the practice of monthly disclosure of Assets under Management (AUM) for mutual funds in India from October and adopt a quarterly basis disclosure for period thereafter.”The average AUM (AAUM) for each quarter (90-day average) will be computed and uploaded on the AMFI website on the first working day of the following month of every quarter, effective from quarter

ending December 31, 2010,” AMFI said. The move is an attempt to placate prevalent feeling among mutual fund companies about monthly disclosure of AUM putting too much pressure on business. Second round of Quantitative Easing for US The federal reserve of US started the second round of quantitative easing of $600 billion in November, 2010 to provide succor to languishing US economy. As a part of the QE 2 action plan the Fed bought treasury bonds of $75 billion per month over the next 8 months resulting in infusion of $600 billion into the economy. The QE 2 initiative was aimed at increasing the excess reserves with the banking system so as to keep the interest rates low and thereby stimulate borrowing and spending activities in the economy. Splits Ville for Hero Honda The fall of 2010 saw the end of one of the country’s most successful JVs as its founding partners India’s Munjal family and Japanese vehicle maker Honda went their separate ways. The JV which lasted for 27 years was was the biggest manufacturer of motorcycles in India with a domestic market share of almost 50%. This decision was borne out of their conflicts on a number of issues ranging from Japanese firm’s reluctance towards full and free technology share agreement ,Munjal family was also not keen on paying high royalty payouts to Honda, Hero Honda’ s refusal to merge its spare parts business with Honda Motors India, a fully owned subsidiary of Honda. The split was carried out through a two tier deal the first of which saw the Munjal family led by Brijmohan Lal Munjal group acquire the 26% stake of Honda Motors in Hero Honda through a Special Purpose Vehicle (SPV) by raising bridge loans. Next the 60-70% of this SPV was divested to private equity firms for loan repay purpose. Following the split Hero Honda Motors Limited rebranded itself as Hero Moto Corp. in June, 2011 following shareholders approval. The

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The Niveshak Times Munjal Company, which owns Hero Group, holds the rights to the name, Hero Honda till 2014. Hero Group has kept INR 100 crore aside for developing a new brand identity that includes positioning, logo and new name. Paras Pharmaceuticals bought out for Rs. 3260 crore UK based consumer goods firm, Reckitt Benckiser bought Indian pharmaceutical firm, Paras Pharmaceuticals for Rs.3260 crore in December,2010. As a part of the deal Reckitt acquired 63% and 30% of stake from UK PE firm Actis Capital and Patel family, the original promoter of Paras respectively. The deal added some of the fastest growing brands in the OTC market like Moov pain relief ointment and Crack, a cracked heal treatment to RB’s portfolio. Ispat Industries mopped up 41% stake in JSW The end of 2010 was witness to another major deal as Sajjan Jindal led JSW Steel bought a 41% stake in Mittal brothers, Pramod and Vinod owned Ispat Industries for Rs. 2157 crore. The deal gave rise to a new entity named JSW Ispat Steel issued 108.66 crore equity shares on a preferential basis of Rs 19.85 per share. The deal provided the much needed help to the beleaguered Ispat Industries to refinance its debt of Rs.7500 crore and also provided funds worth Rs. 3100 crore for its long term investment needs. 2G Spectrum Scam exposed The fall of last year also bought some shocking news of power abuse to the Indian masses with the disclosure of 2G scam by the government. Rs. 170,000 Cr. (Rs. 1.7 trillion) scam surrounding 2G spectrum allocation to telecom companies in India is considered to be one the largest in recent times. The purported culprit in this fiddle is Mr. A.K Raja, the telecomm minister in 2008 under whose leadership the 2G licenses were allotted to new entrants in telecomm industry on a “First Come First Serve” basis rather than through the process of auction as required by the national telecom policy 1999. The ministry had also brought forward the august

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cut off time by 6 six days from October 1, 2007, to September 25, 2007 without seeking consultation of and informing other related ministries, even though when it is mandatory to get an approval from the cabinet committee (economic affairs) in such important decisions. Moreover the shortening of the cut off time was communicated only to the supposedly telecomm ministry favored companies. These newbie who received their share of 2G spectrums at 2001 price level instead of the required 2008 one went on to make profit by selling their stake to the experienced players at high prices. Further discrepancies in allotment process were ex-posed with 85 out of the 122 new receivers turning out to be ineligible and some of them even did not have any telecom infrastructure, network, subscribers, knowledge or proven track record in the telecom business. As further investigations were made into the scam MP Kanimozhi, daughter of DMK chief M Karunanidhi was arrested along with A Raja for involvement in the scam. Currently Dayanidhi Maran is also being questioned by CBI for his alleged involvement in 2G scam. Citibank embroiled in a Rs.400 crore money laundering scam Another scam to make the headlines in December last year was the Rs.400 crore fraud involving global financial services and banking firm, Citibank. The fraud being carried out at the bank’s Gurgaon branch involved siphoning of funds from its HNI customers. The chief culprit in this scam is Shiv Raj Puri the relationship manager at Gurgaon branch who lured HNI customers into investing in fraudulent scheme that offered high returns. The money invested by the HNIs into the scheme was instead diverted into different accounts that Puri had opened at various places in the name of his close relatives. Following this Gurgaon police arrested Shiv Raj Puri who upon questioning divulged the name of Sanjay Gupta, the CFO of Hero group as one of his accomplices. Gupta is alleged to have formed two finance companies BG Finance and G2S and

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invested around Rs 250 crore from different Hero Group companies and their promoters into these companies apart from taking a commission of Rs. 20 crore from Puri. Top Management shakeup in Wipro Girish Paranjpe and Suresh Vaswani, the joint CEOs of Wipro’s IT business have been replaced by T K Kurein. The reason behind the ouster is purportedly the relatively poor performance of Wipro as compared to its rivals like TCS and Cognizant. However the company owner, Azim Premji quoted simpler organization structure as the reason behind the replacement. Some even consider this change as a move to pave the way for Premji’s son Rishad to have full control when he is ready to take over. Before this announcement Kurein was working as the CEO of Wipro’s eco energy division and in the past has also served as chief executive of Wipro’s healthcare & life sciences business, and the telecom service provider business. Patni bought by iGate for $1.2 billion Patni Computer Systems’ seemingly elusive search for a buyer ended in second week of year 2011 as it found an acquirer in Phaneesh Murthy founded iGate. The winning bid made by group of iGate and PE firm, Apax Partners at Rs.503.5 per share values Patni at around $1.45 billion which is roughly 8 times its EBITDA and 1.6 times its revenues. iGate bought 45.6 % stake of 3 Patni brothers and 17.4% stake of PE firm General Atlantic in Patni apart from making an open offer of additional 20.6% stake in Patni which put its total shareholding at around 83.6%. The new entity was named iGate Global. Vibrant Gujarat, 2011 attracted investment of $450 billion in Gujarat Vibrant Gujarat, 2011 5th global business summit orgainsed on 12-13 January, 2011 at Mahatma Mandir, Gandhinagar proved to be major success in terms of drawing investments from major business conglomerates. 13 country and state seminars were orgainsed during the two day long summit

which had participation from 101 countries with over 1400 delegates. About 7,936 memorandums of understanding (MoUs) worth Rs. 20,83,000 ($ 450 billion) crore were signed at Vibrant Gujarat Summit 2011 along with 100 ties up with leading global institution for knowledge exchange. The major investments by business houses include Rs.80, 000 crore by Adani Group in power generation, port and infrastructure, Rs. 50,000 crore by Reliance Industries in refinery expansion, Rs. 50,000 crore by ADAG group in energy and cement industries, Rs.30, 000 crore by Essar group in various sectors, including power and refinery and Rs.15, 000 crore by L&T in Infrastructure Projects. Facebook received $500 million investment from Goldman Sachs Facebook attracted a $500 million investment from banking behemoth, Goldman Sachs and a Russian investor in beginning of 2011. This deal increased the valuation of Facebook to $50 billion putting the networking site ahead of companies like eBay, Yahoo and Time Warner in terms of valuation. The new funding was used by Facebook for talent pool expansion and new product development. This new deal signaled the increasing strength of Facebook while adding pressure on the company to go for a public offer. Schmidt makes way for Page as Google’s CEO The year of 2011 brought a new leader for Google as Larry Page replaced Eric Schimdt as the company CEO. Schmidt continued to serve as the executive chairman of the company which many analysts feel has become a slower moving bureaucracy as compared to younger, more agile rivals like Facebook, Twitter, etc. Surprisingly replacement was made after the company came out with its stellar third quarter results that saw a 32.3% hike (year on year

The Year That Was

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The Niveshak Times basis) in its net income to $2.17 billion. Myspace acquired by Specific Media for $35 million News Corp has divested its majority stake in Myspace for $35 million, a fraction of $580 million the media giant once paid for the same holding in 2005. The huge gap between buy and sell price for News Crop for its stake in Myspace marks the failure of News Corp investment and also shows the unpredictable preference of investors in social networking world. Advertisement firm Specific Media along with singer Justin Timberlake will acquire News Corp’s stake in Myspace. After this deal News Corp’s holding in Myspace will come down to 5%. The deal was in sharp contrast to the sky high valuations being commanded by Web based startups like Zynga, Linked In, Twitter, etc. Aegis, Saudi Telecom sign $2 billion deal Essar Group firm Aegis has signed a $2-billion deal with Saudi Telecom Company in the beginning of February, 2011. As a part of this deal Aegis manages the customer care operations of the largest telecom operator in the Kingdom of Saudi Arabia. The joint venture, Contact Centre Company, is near-equally owned by the two arms, with 50% plus one share being held by STC and the rest under Aegis, which has operational control and responsibilities. Face book valuation up to $65 billion General Atlantic bought a 0.1% stake in Face book in March this year, an investment which will value the social networking site at $65 billion. The General Atlantic investment involves the purchase of a block of roughly 2.5 million shares of stock from former Face book employees. The last major investment in Face book, made in January, had valued the company at $50 billion. The company had said it raised $1.5 billion in a financing round led by Goldman Sachs and Digital Sky Technologies. The latest investment, which values the company at $65 billion, means that the social networking site’s value has grown by 30% in less than two months.

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Change in Top management at Infosys Veteran banker, KV Kamath took over as position of chairman of Infosys from company’s founder Narayana Murthy in May, 2011. The appointment of new chairman was followed by two more changes- S D Shibulal currently the company CFO has been appointed CEO and MD while the incumbent S Gopalkrishnan was promoted to the post of executive co-chairman. Murthy has been made the chairman emeritus, a non executive chairman as a token of respect for his invaluable contribution towards the organization. Rajaratnam held guilty in insider trading trial The biggest insider trading trial in the history of SEC that had began in March this year came to an anticipated end in May as the accused hedge fund manager, Raj Rajaratnam was found guilty by Manhattan federal jury on all 14 conspiracy and securities fraud charges of insider trading. Galleon Group hedge fund founder could face 15-1/2 to 19-1/2 years in a federal prison under sentencing guidelines. Defense team’s persistent claim that Rajaratnam’s trades were guided by a trove of research and public information, no secrets leaked by highly-placed corporate insiders proved futile as the jury was in agreement with the prosecutors who alleged that money manager played a central role in the most sweeping probe of insider trading at hedge funds on record. BP-RIL ink $7.2 billion deal BP entered into a $7.2-billion deal to jump into India’s oil and gas sector with Reliance Industries in February this year. The partnership across the full value chain comprises BP taking a 30 per cent stake in 23 oil and gas production sharing contracts that Reliance operates in India, including the producing KG D6 block, and the formation of 50:50 joint venture between the two companies for the sourcing and marketing of gas in India.

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The deal received approval from Government of India later in August this year. RCOM, R-Infra excluded from SENSEX BSE’s index maintenance committee replaced two ADAG group scrips, Reliance Communications (RCOM) and Reliance Infrastructure (R-Infra) with Coal India and Sun Pharma in SENSEX index. The changes became effective from August 8. Over the past one year both these stocks have lost around 50% of their market value. The inclusion of Coal India, the most valued PSU was on expected lines after its stupendously successful IPO in November, 2010. NSE held guilty of unfair trade practices by CCI The Competition Commission of India (CCI) has held the National Stock Exchange guilty of indulging in unfair market practices contrary to the spirit of healthy competition. CCI has imposed a penalty of Rs.55.5 crore on NSE. In addition, NSE may also have pay damages to MSX Stock Exchange, its currency futures rival in the event of the latter party making a claim. The decision probe by CCI was given after a probe initiated in response to a complaint filed by MCX in November, 2009 alleging that NSE was subsidizing its currency derivative operations by way of a fee waiver. Christine Lagarde, the first female IMF chief French Finance Minister Christine Lagarde had been elected to the post of managing director of IMF in last week of June. The election of Christine Lagarde is the first time a woman has been elected for the top job at IMF. Lagarde takes over from Dominique Strauss Khan who quit the post in the wake of the sexual assault controversy surrounding him. The election was in line with a convention dating back to the creation of IMF according to which Europe has always held the top job at the international money lender. Now FII can purchase government debt

bonds SEBI has allowed FII to participate in biding of long-term government debt bonds on August 5 in which the minimum amount is Rs 100 crore. However a single bidder will not be allocated more than Rs.600 crores worth bonds. Amendments in SEBI takeover code a boost to hostile bidders In what may be termed as a potential game changer for M&A industry in India market regulator SEBI has made amendments to takeover code that are expected to make the acquisition process much easier. One of the major changes has been the raising of the mandatory open offer trigger from 15% to 25% which allows the companies to acquire up to 24.9% stake in another company without having to go for the mandatory open offer. Moreover the minimum stake to be acquired through open offer has also been raised from 20% to 26% thereby giving a hostile bidder a distinct chance of acquiring 51% controlling stake in target firm. The above mentioned changes makes companies with low promoter holding a likely takeover target. US stunned by historic downgrade in its sovereign rating S&P made an unprecedented move by downgrading US sovereign rating by one notch from gold standard AAA to AA+. The rating agency has maintained a negative outlook on US and is not confident about the ability and resolve of Obama administration to simplify U.S.’s complicated and arcane tax system and make bold cuts in its social welfare schemes. The downgrade was met with sharp retaliation from US government and America Inc, a reaction on lines with any nation slapped with a rating downgrade. Many top officials in U.S. government raised questions about the credibility of ratings and also alleged a mathematical error and judgment bias made by S&P in arriving at its downgrading decision. The negative ramifications of this event were felt immediately as stock markets all over the world were sent tumbling into a downward spiral for the next few days.

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He Speaketh

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Mr. Sunil Mitra

Finance Secretary, , Ministry of Finance Mr. Sunil Mitra is an IAS officer of the 1975 batch (West Bengal Cadre). Presently, Mr. Mitra is the Finance Secretary and Secretary at Department of Revenue in the Ministry of Finance. Mr. Mitra is involved in policy making related to taxation and revenue generation for the Government of India. Niveshak: Good Morning Sir, we would like to begin by knowing briefly about your work at the Ministry of Finance? Mr. Mitra: I first joined as disinvestment secretary. The Ministry of Finance has five departments –disinvestment, financial services, economic affairs, expenditure and revenue. I was in disinvestment department for six months during which we were able to create a policy for disinvestment of the public sector units which is now in operation. Then I moved to the department of revenue. The department of revenue is concerned with all the tax revenues of the Government. The department of revenue operates through two boards – Board of Direct Taxes and Board of Excise and Customs which is indirect taxes. The department of revenue is also the nodal agency for all economic offenses. The Enforcement Directorate, Directorate General of Revenue Intelligence, Central Excise Intelligence, the Central Economic Intelligence Bureau work with the department of revenue in matters of economic offenses. Because of the complexity and nature of work at the department of revenue, it is perhaps one of the largest departments under Government of India. This is in brief the functions I was responsible in the Ministry of Finance. Niveshak: Moving ahead, we find that the tax to GDP ratio of India is rather low? What steps are being taken by the Ministry of Finance in this matter? Mr. Mitra: The tax to GDP ratio is definitely one of the most important indices in any economy. In the year 2007-2008, we touched the highest tax to GDP

ratio and the number was 12%. This was only for the Central Government, if you also include the state, then the number for India as a whole works out to be about 18%. Within the states, the ratio of tax to their GSDP ranges between 3-% depending upon the level of economic development. The year 2008-09 saw the global recession and that caused the revenue to fall for the Central Government. The revenue of states weren’t affected much as it is driven by domestic demand. As the global economy recovered, our revenues improved. Infact the revenues in 201011 was even more than 2007-08 in terms of absolute numbers but the tax to GDP ratio fell to 10%. The major reason behind this fall was high inflation. The notional GDP grew by about 22% whereas the actual growth was only 8.5% due to high inflation. Niveshak: Sir, Isn’t tax evasion a major reason behind such low tax to GDP ratio? Mr. Mitra: Tax Evasion has certainly been a issue from a long time. The major reason behind tax evasion was very high tax rates in the early 80’s and 90’s both on direct and indirect side. I remember importing a car in the 90’s and paid about 110% of the depreciated value of the car as taxes. However, the policy of the government has been on a consistent basis reduce the rates and widen the tax base. We have come from 11 slabs in the 90’s to 3 slabs now and a maximum margin tax on income of 30%. To my understanding, the laffer curve has now peaked for India and it is not possible to reduce rates anymore. Also, we have studied the direct and indirect taxes in various countries and we are practically on par with

.. The revenue of states weren’t affected much by global recession as it is driven by domestic demand.

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thresholds. Central excise has a turnover threshold of 1.5 crore. Sales tax has threshold of 5 lacs. The constitution allows for two different empowerments. The legislature must be sighted what the tax structure should be- that’s its sovereign function. Parliament for central govt, State legislatures for state taxes. There’s a central list, union list and a concurrent list. Who can legislate on what is clearly laid out. Centre taxes for what states manufacture and also impose tax on inter-state movement of goods and services. Initially, we decided on only one GST rate across all states, but the agreement was impossible amongst all states who have different political agenda and different level of commitments to respective constituencies. Same thing is happening to VAT. Initially 4 and 10%, now each state is increasing the VAT to 15%, 16% once the centre told them that they will be compensated for loss of revenue due to GST. If you have to allow State GST and central GST, you have to change the constitution, which is not allowed. So we asked states, that so as to enable GST we should amend the constitution. So we have been working on the amendments. And for all of this to work, you have to have a strong IT backbone i.e. the GST network – shared by Nandan Nilekani and some of my members. It is a nationwide network having basic functions – registration, payment and filing of returns. This network is almost ready.

Niveshak: Sir, the GST has seen a lot of protraction. Niveshak: Sir, one thing regarding DTC tax regime will be simplification of tax code and focus on long What’s your take on that? term investing? Mr. Mitra: The whole point behind GST is to substitute Central Excise and Services tax. This means Mr. Mitra: First thing is Direct Tax Code will have the that across the value chain of any product into which tax rate in the law itself, which earlier wasn’t there. inputs go for goods as well as services you can avail Until now no one knew what the rate will be even credit which you can utilise for the next set of taxes. for the next year, how will investments come in India So, cascading of taxes will be avoided which cur- when they don’t know what the tax rate is. But that rently has resulted into net tax of 27-37% across the doesn’t mean that if we are putting the tax rate in country. This is unsustainable. Also, this is not allow- law we cannot change it because a finance act may ing Indian industries to be competitive globally. 116 amend that also. But the fact is that greater idea is to countries have already adopted GST. However, there bring more stability to the investment environment. are some political and legal hurdles which are lead- If you say that this is what my taxation system is ing to delay in GST. The Central Excise laws are very going to be , both for domestic as well as offshore complex and the new tax regime that will come has transactions , this will bring in greater stability. to look minutely into a lot of indirect taxes. So, it is Niveshak: Sir, you said every investor will invest if taking time to get a sound GST. probably he knows the tax code and thus in advance

Niveshak: When will GST get implemented?

will be able to make better decision?

Mr. Mitra: GST does not necessarily have to be implemented at the start of the financial year. But I don’t see it happening at the beginning of next FY. We have been talking to states regarding the structure, their

Mr. Mitra: Knowing only rate doesn’t matter. They shall also know what taxation system is and also what taxation structures are present. See this is not only about Direct Taxes, a lot of state taxes have also

He Speaketh

everybody. The whole emphasis of policy now is to create as much distance between the tax payer and the tax assessor. The idea is to use IT and eliminate the need to go to a Income tax officer. In this direction, we set up the centralized processing centre in Bangalore in 2010, which is now taking 100% of the corporate tax returns. It is processing about 1.5 lac returns a day. We are trying to make things easier for the tax payers. The other policy measure has been to reduce the inherent complexity in the IT Act. We introduced the direct tax bill in the parliament which will become a law in 2011. On the indirect tax side, we came with the GST which will subsume excise and a whole lot of other indirect taxes like Octroi, amusement tax, betting and gambling tax, then of course VAT. The idea is to merge all those and harmonise them. This is one other aspect which is at work. Evasion is something you would never be able to tackle administratively. You have to create a regime where taxes are simple to pay and are low. This will help them sleep comfortably at night and so they will pay tax. IT has helped a lot in this aspect and has been used in customs, excise and direct taxes. 98% of Central excise is collected on ACES – Automation of Central excise and services. 74% of service tax is collected online. So, these are the reforms that we have been working on so that it becomes easier for tax payers to pay taxes and not indulge in tax evasion.

He Speaketh

NIVESHAK

to be paid. So our whole idea is to bring DTC and GST together, so that you can create an environment across taxations in India both direct as well as indirect which will be much more conducive for investments. Let me also tell you it is not taxation that make people invest in country rather it is the growth. Biggest challenge in Ministry of Finance India is how to balance growth with inflation. Niveshak: Sir RBI is increasing rates so frequently; do you think that growth momentum can continue? Mr. Mitra: I don’t think FDI has anything to do with RBI’s lending rates. RBI’s change in lending rates effects plan of existing corporate in India, as far as there expansion is concerned. Certainly you would have read interviews in various newspapers where I have said that I am worried about it because of immediate reactions. You see inflation you can curtain through monetary inflation in one way by restricting money supply and that’s the only way. The other end of it is the supply end, now if you can increase supply which is ideal nothing like that. That will control the inflation straight away but that is not that easy. It takes time, if you invest today it will take years before you can gain in terms of output. So this whole business therefore will have to be curtained by tightening monetary policy. Unfortunately tightening monetary policy also has a problem. For example automobile sector is suffering today because loans are more expensive, people are thinking twice before buying a new vehicle. Corporates are thinking twice to borrow money for investments and then the growth will affect the employment that will also affect the corporate taxes which worries me. And also what happens when you have inflation people tend to spend less. See in India 36% is our savings and that automatically implies that asset creation from that savings automatically suggest a growth rate of 8-9%. So that is the good thing about India. You don’t need the overseas market to revive before your economy revives.

will be able to achieve it?

Mr. Mitra: Government did 50000 Crore last year more than what our target was. We had aim at 745000 crore and we did 795000 Crore. Last year our target was 5.1% and we did 4.67%. This year target is 4.6% and we will do it. There are all kind of negatives out in the open but one thing you must remember on expenditure side there is always scope to reduce expenditure because when you go about making a plan every department wants a larger allocation because it a political optics and it is a good thing to say that we have increased education from so level to so and so level but departments must have the capacity to spend money. So you have to give department sufficient money but not that much money that it remains idle. Niveshak: What

Mr. Mitra: Financial inclusion is a complex thing to deal with. Now people are saying there are zero balance bank accounts. To push banks out in rural areas you need to have broader coverage. The banking correspondence system that are operating today in the rural markets need to be more intensified. Even today NREGA’S is coming through banks. One major problem that we have is in our delivery system, there are huge leakages in these systems. North Eastern India is the place known to be most prone to this. We need to have a delivery system that operates better. If you invest one rupee at central government you shall have one rupee les some of the transaction cost to the beneficiaries. That’s not happening in India today, corruption at various levels is taking care of large amount of funds that are allocated. So the UID numbers whose distribution will begin in October this year will become main method for us to transfer the subsidies. So the subsidies will be transferred directly to beneficiary’s bank account.

Niveshak: Sir Government has kept very aggressive target for Fiscal Deficits do you think Government

.. Tax Evasion would be greatly reduced with the simplification of tax laws in India

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2011

steps are government taking to bring

in financial inclusion in India?

NIVESHAK

Vice-President, Global Research , HSBC Bangalore Mr. Utkarsh Majmudar has extensive experience in academia and in the industry in the domain of Finance. He is currently the Vice-President, Global Research at HSBC Bangalore. He completed his PGDM from IIM Lucknow and FPM from IIM Ahmedabad. He taught at IIM Bangalore and IIM Lucknow before joining HSBC. He has also worked for iGate Global Solutions Limited and GE Capital India Services. While studying an industry one is often at a loss at what drivers one should look at. You will find a detailed look at individual industries in this issue. However, this piece will take you through a few industries and sectors so that you get a good sense of what seasoned business analysts look at when they look to study industries. For example, if you were looking at the aerospace industry, one of the key drivers for this industry would be passenger and freight traffic. Economic growth impacts demand for premium passengers (business class/first class). Other inputs include tourism growth. Shorter-term input is the consumer confidence that determines travel intensity – reflecting changes in consumer Forecasts of these key drivers will feed into the demand for aircrafts and subsequent capacity plans for airframe manufacturers. For those looking at automobile sector one of the key determinants would include fixed cost utilization. Car makers must spread fixed costs across as many units as possible to gain from economies of scale and standardisation. Another element is pricing – pricing determines carmakers’ margins. Pricing is influenced by segment product mix shifts, new product launches and competition. In addition, companies do not always manufacture cars where they sell them. This exposes them to currency risks. Japanese carmakers have benefitted from a weak yen in the past. Steel is the largest contributor to the cost of manufacture (accounting for over 60% of total cost). Steel prices affect the demand for cars. So do interest rates. Higher interest rates hit carmakers from both sides – higher fi-

nancing costs for the company as well as a higher financing cost for the consumer. Another interesting industry is banking. Banks receive money in the form of deposits from those with cash surpluses and lend to those who need. Lending is impacted by economic growth – lending being positively correlated to expanding economic conditions. Deposits on the other hand are impacted market yields and alternative investment opportunities. Asset quality is another important determinant. Non-performing assets tend to rise during economic difficulties thereby forcing banks to increase loan loss provisions and write-offs. This has been most obvious during the recent subprime crisis. A significant business segment that has come up of late is that of business services. Outsourcing companies have exposure to their contracts. This is driven by profitability of the outsourcer and the economic conditions that it faces. Margins of BPO companies are largely determined by the contract mix. The more complex the contract (professional services versus sales calls) often the higher the revenue will be. The few examples that have been cited will give you a sense of how complicated the study of industries can be. It also tells us how we can increase the value of our analysis by gaining a good understanding of an industry by constantly updating ourselves with trends in the industry factors as well as changes in the macroeconomic scenario.

Good understanding of an industry requires constantly updating onself with trends in the industry factors as well as changes in the macroeconomic scenario

He Speaketh

Mr. Utkarsh Majmudar

He Speaketh

NIVESHAK

Dr Jean Imbs

Professor, Paris School of Economics Dr. Jean Imbs is Professor at Paris School of Economics, Directeur de Recherche, CNRS. He has several research papers and publications attributed to his name in the field of economics. After completing his Ph.D in New York University, he has taught economics at various renowned schools, few of them being, London Business School, HEC Lausanne and Chicago Graduate School of Business. Apart from this, he has also worked as a consultant with various economic bodies like World bank, IMF, European Central bank and European Commission. Niveshak: Looking at the crisis that has been plaguing Euro for a couple of years, is there a possibility that the situation

Spain Domino Effect?

might get worse and countries like will fall under the

In a candid interview with Team Niveshak, Dr Jean Imbs shares his views about the on-going Europe debt crisis and its repercussions. He also presents his views about the future of world economy

Dr Imbs: My sense is that it is unlikely. Contagion continues to be a possibility, as the result of self-fulfilling prophecies. It is because markets expect contagion that they charge large premia on countries that are perceived to be risky, which worsens their situation, and the prophecy can actually come true. So, it is important to anchor markets expectations that they do not stand to actually win from betting against stability. The recent agreement by the European authorities, the ECB and European governments did i think a convincing job of that, with the temporary selective default agreed on for Greece, and the (small) private participation. More pointedly, i think Ireland, Spain and Portugal are less worrisome than Greece. Their labour markets are much more flexible - especially Ireland’s, perhaps Spain’s as well. Most importantly, their levels of debt to GDP ratios are very substantially below Greece’s. Spain for instance is barely around 60-70%. That gives a lot of cushioning. Niveshak: If yes, given that Spain has total debt of around $2.3 Trillion, which is third largest debt in world, will it lead to a major crisis in the entire continent? Dr Imbs: If Spain was to go down (but once again this is extremely unlikely), then yes, the crisis would become ma-

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jor. The Spanish economy is larger than Greece, Ireland and Portugal taken together. The European stability fund is not equipped with the type of funds that would be sufficient to do with Spain what was just done with Greece. That would probably spell the end of the euro - at least as we know it. That said, and to be perfectly clear, this is an event that is extremely unlikely Spain has low debt, is reforming it, labour markets are flexible, so there is very little danger this would happen. It is in fact probably not even worth talking about. Niveshak: What

were the major causes

for such a sovereign default to take place and persist for such long time?

Dr Imbs: I am not sure what sovereign default we are talking about. As far as i know, no “default” happened in the conventional sense of the word. The issue is one of sovereignty, but at the European level. In the current state of the EMU, fiscal policy is decided independently at country level, but monetary policy is decided in Frankfurt. That is a recipe for disaster - and one that was foreseen by many economists right from the beginning of EMU. What is the problem? In flexible exchange rate systems, dispendious fiscal policy, and large levels of debt translate into depreciating exchange rates. With a depreciating currency, a country becomes able to generate net exports, and ultimately to use these surpluses to pay back its debt. Obviously, in EMU that can’t happen. Typically, a country in EMU that has a serious competitiveness issue will tend to see its deficits

NIVESHAK

Niveshak: Is

Niveshak: If USA comes up with Quantitative Easing, will it bring

developing economies that have been witnessing high inflation and uneven growth?

there any fundamental solution to this

Dr Imbs: Inflationary pressures in the developing world come from high growth in the developing world. With china growing at 10%, it would be strange for inflation not to creep up. A fixed exchange rate with the USD does also contribute to inflation in fast growing economies. The exchange rate should appreciate when a country grows faster than its trade partners.

problem so that such crisis doesn’t repeat in the future?

How significant a role can IMF play in this?

Dr Imbs: The only serious, durable solution to this problem is to have internal adjustment mechanisms within EMU that can take the place of what the exchange rate does. One is enhanced labour mobility - but that is unlikely in the near future. Another is fiscal redistribution between European states. Under such a system, it would be automatic for Greece to benefit from European redistribution as its debt level increases.

The fact it doesn’t creates in some sense the mirror image problem to the European one i described earlier. Surpluses accumulate and create massive global imbalances. Inflation is but a symptom of this. Now, it is probably the case that increased liquidity in the US, generated via monetary policy, does have an effect on prices in the developing world, especially real estate prices. But it is i think somewhat disingenuous to ascribe all of the inflation in fast growth developing economies just from US monetary policy. The numbers do not add up.

This means fiscal federalism - which is of course enormously difficult to implement in Europe. It would effectively mean for individual countries to relinquish their fiscal sovereignty, something rather unlikely in the near future. At least, fiscal federalism won’t say its name in Europe for a long time still. It is possible some policy steps will be taken that take us closer to such federalism, but it is likely a slow process. Niveshak: What

are the reasons behind

tinuously increasing investments in

China’s

European

another round of more instability to

Niveshak: How

do you visualize the movement of

world economy for the coming couple of years?

con-

indus-

Dr Imbs: It is unlikely the developing world will continue growing at current high rates. The US should Dr Imbs: China’s savings rates are very high - around enter recovery in the next 6-8 months or so. 40% of GDP. These savings have to be channelled Europe will probably maintain relatively sluggish somewhere. Europe is an entirely natural destina- growth. This will have two effects. First, global tion, especially in terms of diversifying away from growth will peter out - with the Chinese locomotive US investment (and especially investment in USD). finally slowing down. Second, global imbalances will For an investor with a long horizon, it made perfect start correcting themselves, with china exporting less sense to buy assets in Europe during the last crisis, as its growth decelerates, and the US importing less as they were sold rather cheaply. as its consumers re-focus on domestically produced tries?

goods. Yuan will probably appreciate relative to most currencies, and may take along with it several other its $14.3 Trillion debt. If this happens, currencies in the region. USD will probably regain repercussions on Europe and the world some terrain against euro.

Niveshak: USA a default on what will be at large?

is also facing a threat of suffering

.. In the current state of the EMU, fiscal policy is decided independently at country level, but monetary policy is decided in Frankfurt. That is a recipe for disaster - and one that was foreseen by many economists right from the beginning

He Speaketh

Dr Imbs: I don’t think the US is actually facing a threat of suffering default. If they did - and again i don’t see any reason why they will - it would be a serious global shock, with global interest rates going up, liquidity drying up and risk increasing.

build up, including the fiscal position as governments try and stimulate demand via increased spending or low taxes. But this translates into debt, which should affect the exchange rate so that competitiveness improves internationally. In Greece, spending and tax cuts didn’t have much of a stimulating effect, especially in the middle of the global 2007-2009 recession. So debt built up out of proportion, and no adjustment channel was available.

He Speaketh

NIVESHAK

Mr. B. R. Tripathi

Chief Commissioner, Central Excise & Service Tax Department B.R.Tripathi is the Chief Commissioner (A.R)/CDR, Customs, Central Excise & Service Tax Department. Previously he has served as Assistant Commissioner, Deputy Commissioner, Additional Commissioner and Commissioner at Mumbai, Delhi, Pune, Patna and Ahmedabad. He also has experience as Under Secretary in the Department of Revenue, Ministry of Finance and Deputy Director of DRI, Delhi during the period from 1983 to 1986. He was promoted to post of Chief Commissioner, Lucknow Zone in April, 2009. Mr. Tripathi completed his post-graduation in Physics (1970) and in Modern History (1972) from Allahabad University prior to being selected for I.R.S.; Group ‘A’ Service by Union Public Service Commission in 1975. During his tenure of service he completed a three year LLB course from Mumbai University (1985) and followed it up with a one year Management Course (1997) from Southern Cross University, New South Wales, Australia.

In a freewheeling interview with Team Niveshak, Mr. B. R. Tripathi shares his views on tax reforms, GST, DTC, issue of Black Money, and gives us insight on how tax system could become more efficient.

Niveshak: It is learned that few years back, revenue contribution to Central Govt. exchequer by the Department was larger than that of any other department, especially vis-s-vis Income Tax. But now Income Tax has become number one on this front. What may be possible reason for this down slide in the

revival and withdrawal of the stimulus packages announced in 2008-09 and maintained in 2009-10. Niveshak: There

had

been

protracted

controversies in implementing the

Will

the current financial year and should we

position?

expect that with its implementation the

Mr Tripathi: It is true that for the last two fiscal years i.e 2009-2010 and 20102011, the collection of Direct taxes has surpassed substantially vis-à-vis the Indirect taxes. The basic reasons are general industrial & economic growth, lowering of rates of Central Excise, Customs and Service Tax as well as deduction of 10% and 20% tax at source as TDS for Income Tax compliance. This trend is likely to continue as the base for Income Tax is bound to increase. Even internationally the rate of Indirect Taxation to the total kitty of a State is lower than Direct taxes. However, a significant growth in indirect taxes has been observed during 2010-11, about 41%, which was as a result of economic

be streamlined and simpler to implement?

tax administration on this front would

Mr. Tripathi: Though implementation of GST by 1st April, 2012 appears to be a difficult proposition, however, it is bound to come and would not be further delayed. This would be a landmark shift in indirect taxation as the goods and services would be at par. The entire spectrum of indirect taxation like Commercial Tax, Service Tax, Excise Duty, Octroi, and other additional duties etc. would be subsumed in a single tax. To begin with, there could be separate Central and State GST, which may later make way for vertical integration of two systems. Of course, this will provide a simpler and streamlined implementation. In new system, the tax payer and the

Though implementation of GST by 1st April, 2012 appears to be a difficult proposition,however, it is bound to come and would not be further delayed.

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2011

GST.

it be implemented before the end of

NIVESHAK

about to introduce a claimed simplified version of

Direct Taxes. Niveshak: In the age of E-governance, how much Is there a similar proposal to simplify the Laws relat- progress has been made by the department in this diing to Central Excise, Customs & Service Tax? rection? their complex

Laws

in shape of

Code

Mr. Tripathi: In the field of indirect taxation, in the last few years there has been rationalization and simplification of the tax structure, procedures, rules and regulations with a view to eliminate disputes and delays in system, to reduce the compliance cost and thereby encourage voluntary compliance. The reforms aim at moving towards moderate tax rate, reduction in disposal rates so as to illuminate the scope for administrative abuse and litigation and broadening of tax base. It is however worth consideration that scope for widening of tax base by way of withdrawal of exemption is limited in the department as the government has also been using taxation as a policy tool /instrument to achieve certain social objective through grant of several Customs, Excise duty exemption. Efforts are on to introduce GST. In order to move towards a unified goods and service tax system, the rate of service tax has been reduced to 10% with effect from 24.02.2009 and credit across goods and services has been allowed.

Mr. Tripathi: As regards E-commerce and E-governance is concerned, the state and central both are well geared up. They will further equip on IT sector. The NSDL and Central and State Governmentâ&#x20AC;&#x2122;s hardware infrastructure and software systems are already in place and being used. Further progress will definitely take care of E-governance. In fact, the GST could not be smoothly implemented unless E-governance is available on line. It is fully geared up under leadership of Mr. Nilekani.

Niveshak: Central Excise Laws

Mr. Tripathi: Of course, in this there is a paradoxical situation. In view of simplification, liberalization, globalization and reduction in rate of duty there had been some perceptible growth in litigation. Most of the protracted litigation are on account of lapses starting from Show Cause Notice stage, invoking of extended period without bringing out the malafide intention, filing of appeals on settled issues, ordered passed in disregard to essential facts of the case and law point involved, imposition of mandatory penalty without proper justification are some of the issues found predominantly in departmental litigation. The dispute that could be resolved at the first level of adjudication continued because the officers are not inclined to pass on order in favor of the noticee for fear of loss of revenue and subsequent

and

Rules

are numer-

ous and exhaustive and the same set of the law and procedures applies to manufacturing houses of all sizes.

The big houses can afford to have a separate wing

with sufficient man power to ensure compliance with intricate

Excise Laws

whereas smaller firms cannot

afford such arrangements owing to the additional expenses to be incurred.

there any scheme or pro-

posal under consideration to resolve this apparent discrimination?

Mr. Tripathi: As far as Taxation Laws are concerned, it could be segmented, but for a class, the laws have to be simple, uniformly applicable to all in one group. Even today for Small Scale Exemption there are simpler laws and low rate of duty. However,

Niveshak: With rationalization of Central Excise and Customs Tariff in succeeding years, it was thought that there would be not much scope left for litigation related to classification and valuation. This would have apparently brought down the litigation volume in the department.

However it is learnt that

there is no perceptible fall in the number of the litigation, rather it is said to be increasing.

How

this

paradox can be explained?

In order to move towards a unified goods and service tax system, the rate of service tax has been reduced to 10% with effect from 24.02.2009 ÂŠ FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

He Speaketh

consumer both will be benefited by way of quantum once the goods and services would be equated and of tax as well as by way of point of contact and it credit would be made available across the board would curtail the multiplicity of proceedings. for all items under the Central and State levy, there would be no discrimination between smaller and Niveshak: The Central Board of the Direct Taxes is lower size entity.

He Speaketh

NIVESHAK

persecution of the officers. Officers are reluctant to sanction rightful refund even in case where the parties have succeeded in appeal. They invariably refuse to grant interest in case of delayed refunds despite clear position of law. In many cases, litigation continued because the noticee has paid the duty but contests imposition of fine and penalty. Sadly the success rate of departmental appeal before all appellate authority is just adequate if not poor, for example it was just 5.5% in 2010-11 for appeal filed in Supreme Court.

Mr Tripathi: Of course our tax ratio to GDP is low compared to developed countries as the number of poor in developed world is not as high as in India. In public finance it is the ‘capacity to pay’ and the ‘ability to pay’ which will determine the ratio of taxes to GDP. If GST would be fully placed and the economic advancement of the country will go up, only then the ratio will go up. Niveshak: Towards the end of May,2011, the finance ministry announced the formation of a committee

Niveshak: The government has admitted, on the basis of data collected, that it is the greatest litigator. Proposals were mooted to bring down this number

Chairman of Central Board of Direct Taxes (CBDT) with an objective of strengthening law to curb generation of black money in India, its illegal transfer abroad and its recovery. What do

by reviewing the cases where the government is an

you think are the possible amendments to existing

appellant, by a

tax laws in

Committee

of expert drawn from

different field or society including taking help of management professional.

there any progress in

implementation of this idea in your department?

Mr Tripathi: The reform in taxation policy and procedure is an ongoing affair. The national litigation policy has been framed by the government to reduce government litigation in courts. The emphasis in the policy is that the government must cease to be a compulsive litigant. At para V of the policy, it is stated that besides other things, the appeal would not be filed in revenue matters if the stakes are not very high. It was accordingly decided by the Board to fix threshold limit below which appeal shall not be filed in the Tribunal and the High Courts and consideration of low amounts would also be factored in examining of filing appeals in Supreme Court. Provisions have been put in relevant Acts and the result of the step is discernible in the number of appeal being filed by the Board in Supreme Court and data collected shows significant decline in appeals filed to Tribunal, High Court and Supreme Court. Niveshak: India’s tax to GDP ratio is only about 17% for the Central and the states combined which is quite low as compared to other developing countries. What steps is the government undertaking to increase its taxation revenue?

chaired by

2011

that may help in achieving the

above mentioned objective?

Mr Tripathi: The issue of Black money had always been a matter of concern of the Government as well as of Direct Tax Collector. Bringing the money from abroad is a vexed issue and is a complicated one. With reference to a particular case i.e of Mr.Ali Hassan and Mr. Toporia where the Supreme Court has constituted a Committee, the Union Government has objected by filing a review petition in the Supreme Court about encroaching on jurisdiction of executives. Again, generation of Black Money and its prevention is an ongoing operation and affair. Unless there is a good amount of overall prosperity i.e availability of goods and services to all segments of society, merely by enforcement of legal machines the generation of black money can not be stopped. It is a premium on a developing economy. Therefore, it may not be stopped all together unless there is a good economic growth and the well being of its people and standard of living is drastically improved the its satisfaction of all. Niveshak: India

is looking to make changes to its

double taxation avoidance agreement with

Mauri-

tius possible as a move to curb black money transaction.

What

are the likely changes to this agree-

ment in your view and what may be the possible

.. In public finance it is the ‘capacity to pay’ and the ‘ability to pay’ which will determine the rate of taxes to GDP

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NIVESHAK

Mr Tripathi: Not only with Mauritius, rather with many other countries, has the Government entered in agreement on double taxation avoidance. In fact, I am not aware about specific changes being contemplated in such agreement with reference to Mauritius as it is subject matter of CBDT and hence we are not kept informed. However, making changes may not prove a remedy in itself rather its enforcement part needs to be strictly executed. Niveshak: What are your views on criminalization of tax evasion in India?

Mr Tripathi: Slowly but steadily the Government on all fronts of taxation i.e law, rate & procedure had liberalized and simplified hoping that tax evasion would go down. The prosecution provisions are rarely resorted to. In fact, there are provisions for compounding of offences. The tax administrators even up to policy formulation level, do not wish that the persons who are generating goods and services and are engaged in raising revenue for state should be put behind bars. However, an element of deterrence is needed otherwise we apprehend that the evasion of taxes in very large measure may go on. Personally, I am of the view that only on tax evasion or avoidance one should not be put behind bar if the duties, fines, penalties and interest have been fully realized. Niveshak: What are the reasons behind the recent notification of CBDT and Income Tax department making submission of PAN card compulsory for all jewellery purchase over Rs.5 lakhs from 1st July,2011?

HR is also being improved as at every hierarchical level there is a programme for compulsory training for officers. The National Academy for Indirect and Direct Taxation at Faridabad and Nagpur are also being upgraded to provide up-to-date and modern skills to its probationers and for lower officers as inhouse training for upgrading their skills. Seminars, Conventions, annual day functions, interaction with the tax payers by way of Regional Advisory Committee, Public Grievance Committee, Service Centers and online registration, assessment and induction of Direct Tax Code and GST are few steps for making the tax administration very responsive and efficient. Niveshak: Lastly I

would request you to share with

our readers as to how far your background of management study has been of help to you during your work period in this department?

Mr Tripathi: Though I have been a post-graduate in Physics (1970) as well as in Modern History (1972) from University of Allahabad before joining the Department i.e directly from University Campus, nonetheless in service I had done regular 3 years LLB course (1985) and one year Management Course (1997) i.e an MBA Degree from Southern Cross University, Lismore, New South Wales, Australia. As ever, it is the knowledge which promotes and enhances discipline, trade, techniques and tools for management and for effective and efficient administration of any discipline. The Management background, of course, had added a new personality attribute to my overall functioning. I had definitely an edge vis-Ă vis my peers and competitors.

Mr Tripathi: This could be a step towards curbing the flow of unaccounted money i.e Black Money or so to say on which Income Tax had not been paid. Niveshak: How

the modern tools of the management

are being utilized by the government to make the taxation system more efficient and responsive?

Mr Tripathi: In tax management for direct and indirect both, infusion of IT is going on in a big way. The

Personally, I am of the view that only on tax evasion or avoidance one should not be put behind the bar if the duties ... have been fully realized ÂŠ FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

He Speaketh

ramifications of such changes?

NIVESHAK

Cover Story Sectoview

Asmita M Karanje

Symbiosis Instiute of Business Management

In this sector analysis, a brief about the $76 Bn IT industry is given which includes the growth trends observed in the recent times, the Global scenario in IT, the effects of slowdown, export potential, etc. Also mentioned is a brief on the players in the sector, their financials, competitive analysis and a PEST analysis of the sector, challenges and opportunities in future.

The 20 year old IT industry is still in its nascent s t a g e with a huge growth potential yet to be tapped. India is one of the biggest IT Capitals of the world w i t h Bangalore being the Silicon Valley of India followed by Mumbai, Pune, Kolkata, NCR, etc. IT sector contributes 5.2% of the GDP and employs nearly 2.5 Mn people with the growth potential of 20% is one of the key sectors driving the nationâ&#x20AC;&#x2122;s economy. NASSCOM (National Association of Software and Services Company) acts as an advisor, consultant and coordinating body for the IT-BPO industry in India. Cost leadership has been the competitive edge of the Indian software sector over the last few years. However, this seems to be threatened now by MNCs who are replicating the Indian outsourcing model and setting up bases in the country. Going forward, the advantage of low employee costs could fade out and the sector could get commoditised.

Global Scenario 1. The global IT services market is expected to grow by 4.2% in 2011 as companies coming out of recession harness the need for IT to create competitive advantage.

2. Indian IT firms (especially the top notch Indian firms like TCS, Infosys and Wipro) are increasingly competing against top global players such as IBM, Accenture and EDS for large deals. 3. The top Indian IT companies are more frequently being invited to bid on large deals that were earlier closed to them. Indiaâ&#x20AC;&#x2122;s top outsourcers are competing effectively with the top three global service providers on large deals. 4. Moreover, global IT biggies like Accenture who used to deal mostly in premium-priced high-end IT services have entered the space of low-end IT services at a competitive price. This has added to the competition.

Growth The Indian IT sector is estimated to have grown by 19 per cent in the FY2011, clocking revenue of almost US$ 76 billion. Before the onset of global recession the industry had seen a growth of around 30% and nearly 100 % during the early stages of the lifecycle. The growth comes down eventually which is a natural phenomenon for any industry as the industry becomes larger in size. The sector employs around 2.5-3 million professionals, directly, account for direct investment of about USD 10-15 billion, and contribute 5.5 cent of the national GDP. At USD 52 billion (excluding hardware), India accounts for around 4 per cent of the worldwide spend on IT soft-

The Indian IT sector is estimated to have grown by 19 per cent in the FY2011, clocking revenue of almost US$ 76 billion; before recession growth was 30%!

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NIVESHAK

Software exports The export revenues are estimated to have aggregated to US$ 59 billion in FY2011 and contributed 26 per cent as its share in total Indian exports (merchandise plus services), according to a research report ‘IT-BPO Sector in India: Strategic Review 2011’, published by NASSCOM. The IT services segment was the fastest growing one within exports, with a growth rate of 22.7 per cent over the 2010 fiscal. It accounted for 57 per cent of the total IT exports and had aggregate export revenues of $33.5 billion. BPO exports touched $14.1 billion in the 2011 fiscal, growing at 14 per cent. These exports are in line with the revised estimates of NASSCOMM which had revised it from $60-$62 Bn on the back of slower recovery from recession and uncertainty in other parts of the world. Major Segments within the sector 1. Hardware 2. Software products 3. IT Services 4. Engineering and R&D Services 5. IT enabled Services (ITeS) The IT-ITeS services include Custom Application Development and Maintenance (CADM), System Integration, IT Consulting, Application Management, Infrastructure Management Services, Software testing, Service-oriented architecture and Web services. A few of the duties that IT professionals perform may include data management, networking, engineering computer hardware, database and software design, as well as the management and administration of entire systems. Players The leading companies in the information technology industry of India are Wipro Ltd, Patni Computer Systems (P) Ltd, HCL Infosystems Ltd, Hexaware Technologies Ltd, Iflex Solutions Ltd, CMC Ltd, Igate Global

Solutions Ltd, HCL Corporation Ltd, Infosys Technologies Ltd, Satyam Computer Services Ltd, Larsen & Toubro Ltd, Tata Consultancy Services, Tata Infotech Ltd and Mastek Ltd. Some of the players such as TCS, Infosys, and Wipro are amongst the top players in the industry with over 75% market share.

Pricing Methodologies The two basic methods used for pricing were fixed price and time and material-based pricing. Under the time and material based pricing, customers are billed based on the number of man-hours spent on a project, while under the fixed price, the customer pays an agreed price that doesn’t vary with the manpower deployed on the project. The other methods of pricing used are MIPS based pricing (based on the on the theoretical throughput of the system (MIPS) on which the software is running.), flat pricing (fixed price for unlimited use of the software product), relationship pricing, value based pricing, etc. The pricing trend is seen to be shifting towards fixed price contracts as it allows them greater flexibility in deploying resources, thus helps in improving margins. In firms like TCS, IBM and Accenture have adopted results based pricing wherein they promise the clients a specific quantum of process improvement, cost reduction and revenue enhancement. If these outcomes are reached, the software firm gets to share a part of the upside. Recently TCS has been able to increase billing rates by 2-3% in a “few deals” in the first half of this fiscal year 2011-12. Pricing has been an elusive variable for Indian technology firms over the last 3 years. In the slowdown, it took just a few months for pricing to drop 3-5%, but it has taken over 18 months of strong volume growth for a shift in vendor outlook on pricing. Pricing has gone up due to rising wages, inflation, foreign currency fluctuations and attrition of key staff driving up billing rates for outsourcing contracts. Prices have gone up by 5% on an average for new projects as experienced by Infosys, Wipro and HCL. Industry Lifecycle IT industry is in Growth

Cover Story Sectoview

ware and services. According to the global InfoTech analyst International Data Corporation, the Indian IT and ITeS market is estimated to grow at the rate of over 16 per cent to become a US$ 132 billion industry in 2020. Furthermore, NASSCOM said that the domestic IT-BPO revenues excluding hardware are expected to have grown at almost 16 per cent to reach US$ 17.35 billion in FY2011.

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NIVESHAK

As of Mar 2011

Percentage share of Revenues from Attrition

Europe

Top 10 clients

Fixed price contracts

Infosys

17.0%

64%

22%

25%

42.1%

TCS

14.4%

57%

25%

30%

49%

Wipro

54%

28%

20%

46%

HCL Tech

17.0%

54%

27%

25%

Tech Mahindra

26.0%

32%

52%

79%

Competitive Analysis – matrix Company

Strengths •

TCS

• •

• • Infosys •

• Wipro

• • •

Mahindra Satyam

•

• Cognizant • • • HCL

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Weaknesses

Strong applications, development and mainte• nance Strengthened BPO post Citibank’s back-office buy. Global footprint; present in over 50 countries. •

In the past few years, Infosys and Wipro have started operations in Latin America, earlier a key differentiator for TCS. A workforce of nearly 2 lakh makes it India’s largest private employer by far and is a huge challenge.

• Strong domain capability in enterprise (BFSI, manufacturing, telecom, retail) and ERP services. Better positioned in consulting, which it has built over the years and brings about 20% revenue. Better basket of services, with presence in growth verticals.

Very small focus on India and emerging markets, the growth engines of today

Infrastructure management and presence in product engineering space ($1 billion revenue). Middle East and Asia presence helps to de-couple from poor spending in West. GE tie-up helped.

• •

Going through a management transition and restructuring after its joint CEO model was scrapped in January 2011. No. 3 position under threat from rivals like Cognizant

• The two companies have compatible, yet nonoverlapping businesses with Tech Mahindra’s strength in telecom and Satyam Computer’s forte in manufacturing. Also, Tech Mahindra is strong in Europe, while Satyam Computer has strength in the US

The company is undergoing scrutiny related to major financial irregularities for the past several years. As a result, the company’s financial result for the past years would be restated.

26% revenues from health care, pharma and life sciences, sectors that are less vulnerable to a slowdown, which helped it ride recession well. Large consulting team.

•

Revenues from India and emerging markets less than 4%.

Consumer electronics, aerospace and defence, • where rivals have little or no presence. Hardware heritage (it was spun out of parent HCL • Info systems) which helped build strong infrastructure management practice. 2008 buyout of Axon helped enter high-end consulting business.

The practice of ceding margins for growth can be risky in long term. BPO not yet out of the woods.

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Sectoview

phase since last 5 years as it can be seen from the growth trends as well as the future outlook of this industry. It is growing at a fast pace as it can be seen through various parameters such as follows:-

in terms of BPO contracts from US. Also with the UID â&#x20AC;&#x201C; Unique Identification programme being launched by the Government under the Guidance of Mr. Narayan Murthy would open up a lot of opportunities for this sector in the future in terms of e-businesses, e-documentation, verification of various governmental formalities speeding the process of various Government activities ECONOMIC The factors that affect the IT industry are rising inflation leading to rise in salaries, global slowdown, competition from other countries, foreign exchange fluctuations, etc. Also looming over the health of the IT industry is European debt crisis, reducing margins and increasing tax liabilities with the end of the tax holidays granted to these companies. Every job created in the IT sector creates 4 other jobs in the economy. Also to be noted is the exposure towards BFSI is as large as 22-30% in the IT companies which can pose a danger in times of economic downturn. SOCIAL The presence of a large number of Indians, especially engineers, in the US gave India an easy entry into the US software market. The social factors that have helped the IT industry are large English speaking population, cheap availability of labour, great number of institutes offering IT course, etc. But this advantage has been slowly shifting towards other countries such as Brazil, Philippines, etc. Also with increasing crossborder transactions employee rights, cultural differences, race and nationality issues, diplomatic relations between the two countries, etc. have cropped up.

Investments The computer software industry continued to witness fresh investments led by a buoyant demand for IT services, albeit at a slower pace. The outstanding investments in the sector stood at Rs.1, 95,106 crore at the end of May 2011. These investments are spread across 559 projects. In May 2011, 67 per cent of the total outstanding investment was under implementation. However, with strong project pipeline and higher anticipated future demand, the industry is expected to ramp up 26 project completions entailing an investment of Rs.7,885 crore in the remaining months of 2011-12.. The total outstanding investments in the software projects include investments in computer software development centres and software parks and better technology enabled delivery mechanisms Macro and Micro Environment Here a PEST analysis would help us better understand how the various macroeconomic factors affect this sector and how it contributes to the economy. POLITICAL With growing rates of unemployment in US touching 9.2%, it has become imperative for the IT companies who had earlier outsourced jobs to the India to now cut back on them by imposing certain regulations which would not enable IT companies to take tax advantages. This would not only affect the revenues of the BPO sector but also hamper any future growth prospects

ÂŠ FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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NIVESHAK

As on 31st Mar 2011

Income

Sales

PBDIT

PAT

TCS Wipro Infosys HCL Satyam Computer Services Tech Mahindra Mphasis Oracle Financial Services Patni computer Systems

8188 7389 7055 1736 1379 1229 874 757 562

7970 7178 6668 1697 1278 1198 827 694 543

2616 1782 2586 406 275 251 208 396 215

1338 1338 1730 260 234 182 164 384 155

LEGAL The IT Act 2000 which was formulated to regulate and govern the World Wide Web, e-commerce, etc. has come a long way in preventing crime in the cyber space, safeguarding the interest of the internet users and giving legal recognition to digital signature. The act also allows the Government to issue notification on the web thus heralding e-Governance. Also as the regulators have allowed publishing annual reports on the companies’ website or NSE/BSE portal, the dependence on the paper report format has reduced deforestation and helped in the efforts to reduce global warming. TECHNOLOGICAL India will see its number of internet users triple to 237 million by 2015, from 81 million registered in September 2010, according to a report titled ‘Internet’s New boon’, by the Boston Consulting Group (BCG). BCG said Internet penetration rate in India is expected to reach 19 per cent by 2015, up from the current seven per cent. Telecom Regulatory Authority of India (TRAI) is targeting a 10-fold increase in broadband subscribers to 100 million by 2014. The country has 10.29 million subscribers now. Also India has the second largest telephone network after china with the lowest airtime tariffs in the world. With newer technology such as 3G, WI-MAX, VPN, CAD (Computer aided design), Web 2.0, cloud computing and others this industry is going to face a sea-change in the way it is operated.

2011

32% 24% 37% 23% 20% 20% 24% 52% 38%

26% 18% 25% 15% 17% 14% 18% 50% 28%

IT to new customer segments are the key drivers for increased technology adoption in India. Increasing number of discretionary projects, improved pricing, and robust business volumes are all driving up the analysts’ expectations who believe that the top IT firms shall grow between 23-27 per cent in the FY 2012. CHALLENGES FACING THIS SECTOR Increasing competition, pressure on billing rates and increasing commoditisation of lower-end application development and maintenance (ADM) services are among the key issues facing the Indian software industry today. Attrition is another concern and the company plans to lower attrition in its IT business below 10% from the present 11% and less than 12% in the business process outsourcing (BPO) side form the current 14.6% The debt crisis in Europe, unemployment in the US and uncertainty in different parts of the world will have an impact on the revenues of the companies in this sector especially companies like TCS which is huge exporter of software services. IT companies will have to move up the value chain to provide higher value-added services as consulting, product development, R&D and end-to-end turnkey solution. Also it needs to diversify into less risky countries and focus inwards into India’s growth potential for the short term period of 1-2 years till the global turmoil settles down. Here the top 9 companies have been taken for financial analysis. Oracle Financial services- a tier 2 company has recorded highest operating margins as well as PAT margins which may skew the industry related information and hence shall be excluded from

Industry Driver and Challenges DRIVERS Strong economic growth, rapid advancement in technology infrastructure, increasingly competitive Indian organisations, enhanced focus by the government and emergence of business models that help provide

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Valuation Despite the macro-economic uncertainties, the demand environment remains strong for the Indian IT industry. NASSCOM has maintained its growth guidance of 16-18% for FY2012, IDC in its recent study has forecast a 5.6% growth in the US IT spends for CY2011 and the strong performance by Accenture and Oracle (in terms of the headline numbers) all hint at a strong FY2012. Though in the near term the sector may witness the impact of the negative news flow regarding the visa issues, the slower recovery of the US economy and the European debt crisis, we remain positive on the IT sector with a 12-month perspective. The tier-2 stocks such as Tech Mahindra, Mphasis are expected to deliver better returns than Tier-1 stocks such as Infosys, TCS, Wipro due to base effect as well as greater exposure to the western markets where uncertainty looms larger than ever. Future Outlook The integration of IT-BPO contracts is expected to become more common, as clients look out for endto-end service providers. Companies like Infosys, TCS, Wipro, Mahindra Satyam, HCL Technologies and Mphasis, all of which are also into BPO, will benefit from this trend On the other side the cause of worry is the rising wage bill, the largest cost component, which is likely

to go up by a faster 20.8 % visa- vis sales in 2011-12. IT companies are expected to increase hiring to meet the rise in demand. They are also expected to give higher wage hike in order to combat the rise in attrition and to combat inflationary pressures. Other expenses, the second largest cost component, which mainly include FOREX losses, is expected to rise at a slower pace than sales. Favourable hedge positions undertaken by the IT companies will help restrict FOREX losses. As a result, the operating margin is expected to remain almost flat at 28 % in 2011- 12. However, the net margin is likely to contract by 1% points to 19 % owing to a sharp rise in the industry’s tax outgo. Fixed price contracts had helped the IT vendors sustain their profitability during the economic slowdown when the billing rates did not increase. And so it makes sense for IT Companies should adopt fixed price contracts as these are non-linear models and are not linked to the number of employees associated with the project. As the rising inflation is putting pressure on the industry’s wage costs, a shift towards nonlinear models would help IT companies control their wage bills and thus improve profitability.

Conclusion Information technology is here to stay and it has huge potential for success especially with the growth potential observed in Government activities as well as various business sectors increasing becoming techsavvy. But in order to sustain India’s edge in the global markets and improve revenues, Indian IT service providers need to shift towards more market-facing breakthroughs. They could additionally, foray new customer segments in intellectual areas like engineering and R&D services, creating IP in emerging technology areas, developing and codifying specific domain expertise to target consulting and system integration services, technical innovations to develop their own standards for next generation of technologies. Also the industry may expect consolidation in the recent future due to scattered and increasing no. of players in this field.

Fixed price contracts had helped the IT vendors sustain their profitability during the economic slowdown when the billing rates did not increase © FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Cover Story Sectoview

the analysis. Amongst the top 3 companies TCS has maintained its profit margin despite increasing software developmental costs. The same cannot be said about Infosys as it can be seen the gap between the operating margin and profit margin is almost 12% as compared to other 2 companies where it is 6%. This is not due to software developmental costs but due to the fact that Infosys is holding nearly 13,000 Crores of cash, nearly 50% of its Balance sheet on which it has gained only 6%. This has been realised by the Company of lately and it is reducing the cash component in the balance sheet. To maintain high cash reserves for future acquisitions is a trend in this sector observed in many players. As these companies are growing in size the margins are coming down and it is expected that in near future the margins shall lie in the range of 18%-20% which means the company needs to increase its asset turnover in order to increase the shareholder value and keep abreast of technological innovations to enhance the EVA (Economic Value added) of the company

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Cover Story Sectoview

Pharmaceuticals IIM, B Sector Sangeeta Patel & Bharathi Priyaa T

Introduction In 1959, the government of India banned the import of drugs. So, the generic drug manufacturers started manufacturing drugs in 1961. Early strategies by companies like Ranbaxy were to keep a close track of drugs being filed for approval by MNCs and then launch them before they did. Around 1967, there were two major interventions by the Government of India (GOI) which impacted the growth and evolution of the India pharmaceutical industry. The first was the introduction of the Indian Patent Act in 1970, which recognized only process patents. Thus it permitted Indian companies to reproduce foreign patented drugs provided they produced them in a novel way. Second, the GOI, in order to ensure availability of drugs at affordable prices, introduced the Drug Price Control that capped prices of select drugs sold in the Indian Market. In essence, there was no compulsion for India with its poor scientific and technological base to allow product patents. That would have meant giving the whole industry to multinationals. Competition is mainly from the domestic manufacturers and imports from China because of the low manufacturing cost. With the new patent regulations the industry expects to see a major structural shift with the entry of foreign pharmaceutical manufacturers. The evolution of the Indian pharmaceutical industry can be broadly divided into two periods, the pre-patent regime and post-patent regime. In the pre-patent regime (before 2005), India recognized only process patents, which helped built the basis of a strong and competitive domestic industry. In 2005, India entered the product patent regime which marked the end of a protected era and signaled a

angalore

new phase in the integration of India players into the global market.

Products and Services The major segments within the industry are categorized as shown below: Contract Research and Manufacturing Services (CRAMS) Lately, India is emerging as the global hub for contract research and manufacturing services (CRAMs) due to its advantage in low cost and world class quality standards. The Indian Pharma industry possesses world standard manufacturing facilities as per the GMP norms which are approved by various regulatory agencies across the globe. Some of the companies have witnessed substantial growth in revenues from their CRAMs business under various tie-ups with global pharmaceutical majors. Examples are Cadila Healthcare, Lupin, Matrix Lab, Nicholas Piramal and Aurobindo Pharma. Active Pharmaceutical Ingredients (APIs) These are substances which are responsible for me-

dicinal activity. For e.g. Paracetamol is an API which is present in drugs like Crocin, Anacin etc. and is responsible for relieving the pain. APIs (also called as bulk drugs) are the raw materials for the final drug that we consume. Famous API manufacturers

In 2005, India entered the product patent regime which marked the end of a protected era and signaled a new phase in the integration of Indian players into the global market

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NIVESHAK

Current State INDUSTRY CONCENTRATION There is a high level of market fragmentation in the industry. As of 2009, there were more than 10,000 firms in the market, of which, around 200 of them collectively controlled about 70% of the market share. The top 10 players in the market had growth rates of over 18% for the 12 months ending July 2010. Of these, Cipla continued to have the largest market share of 5.2%, followed by Ranbaxy with a 4.7% share. TRENDS The Indian pharmaceutical market is growing at a CAGR of 11.7% during 2005–15 and is expected to reach US$ 20 billion by 2015.It is the 3rd largest market in the world in terms of volume and 14th in terms of value. The Indian diagnostic services are projected to grow at a CAGR of 20% during 20102012. Some of the companies like Sun Pharma, Cadilla Healthcare had applied for conducting clinical trials on at least 12 new drugs in 2010 indicating

a growing interest in drug discovery research. The Indian generic market is expected to grow at a CAGR of 17% around 2011-2013.i The key industry trends and its implications are mentioned below: 1) Increased Investments: There has been a shift towards a networked business model along with increased M&A and consolidation in the market. 2) Increasing reach in Non-Metros: This has been observed as the next big trend, though costs of operation are high due to poor health infrastructure.

3) Goods & Services Tax (GST): Upcoming GST would add significant efficiencies to economy and lead to an overhaul of supply chain. 4) Changing profile: There has been a shift towards biotech & specialty therapies along with increased investment in R&D and acute disease segment that will lead to sustained strong growth. 5) Healthcare innovation : There has been a rise in the use of technology & IT for innovation in healthcare delivery PRICE CONTROLS India is one of the most price-controlled markets in the world, as under the DPCO, prices and margins are monitored carefully. The DPCO is being supervised by the NPPA. There were originally 347 price controlled drugs included in 1979, which were then reduced to 143 in 1987 and currently, there are 76 bulk drugs under the DPCO. Price controlled drugs are essential medicines, such as antibiotics and painkillers, and drugs used for the treatment of diseases such as cancer and asthma. Such medicines contain bulk drugs, or raw materials, whose prices are controlled by the NPPA - manufacturers cannot hike prices on their own. However, 90% of drugs are currently outside of any price controls in India. Consumer organizations maintain their stance of urging the government to continue to expand the umbrella of the DPCO, but the industry believes that there is enough competition for the prices to be modulated by the market itself. They believe that price caps would inhibit the development of R&D in the country as companies would be less inclined to invest in R&D without the possibility of high returns. MARKET SHARE STABILITY Recently, the MNCs are gaining huge market share in the pharma sector. The top four pharma companies in India i.e Cipla, Ranbaxy, GSK, and Piramal have lost their market share to the global companies mainly Pfizer and Abbott in 2010. They lost about 0.1%-0.2% in 2010 as compared to 2009 figures, according to the IMS Health 2010 estimates for Indian Pharmaceutical market 2010.This shows that the market share stability of the Pharma sector is low and so the Indian companies can shift focus from market share capture to market share creation. They should exploit the untapped rural market as well as there also exists huge opportunity in clinicals and bio-similars. INDUSTRY LIFECYCLE The pharma market has shown rich growth in the year 2010-11. The future of the Indian pharma market looks promising with a growth of 15-17 percent predicted for the year 2011-11. The Indian pharma market for the year 2010 was valued at US$ 10222 million, with the market for December 2010

Cover Story Sectoview

include Orchid Chemicals, Elder Pharma etc. Formulations While APIs are responsible for the medicinal effect of a drug, one cannot directly consume an API due to various reasons like stability, taste, odour etc. Hence APIs are combined with certain substances called excipients to form the final drugs or formulations which are suitable for human consumption. Example of a formulation is Crocin. Companies like Sun Pharma, Cipla, Dr. Reddy’s etc. are examples of companies manufacturing formulations.

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Cover Story Sectoview

alone valued at US$ 889 million.

Macro Policies & Regulatory Framework The Central Drug Standard Control Organization (CDSCO), which falls under the purview of the Ministry of Health and Family Welfare, is the primary regulatory body in India. The Drug Controller General of India (DCGI) presides over the CDSCO and is in charge of the approval of licenses for drugs at both the central and state levels. In January 2005, India introduced the product patent regime in accordance with the TRIPS agreement with an amendment to the Indian Patents Act. Further, in 2008, the introduction of the Drugs and Cosmetics (Amendment) Act 2008 put forth stringent penalties and imprisonment. FDI of up to 100 per cent is permitted through the automatic route in drugs and pharmaceuticals including those involving use of recombinant technology. The GoI plans to set up a 639.56m US$ venture capital fund to give a boost to drug discovery. It has also issued an Expression of Interest for technical and financial bids for the selection of a global level consultant for preparing a detailed project report for developing India as a pharma innovation hub by 2020. The Department of Pharmaceuticals has prepared a “Pharma Vision 2020” for making India one of the leading destinations for end-to-end drug discovery and innovation. It is embarking on a major multi-billion dollar initiative, with 50 per cent public funding through a PPP model, to harness India’s innovation capability. In the third quarter of the calendar year 2010, a total of US$ 2047 million was invested across 88 deals, of which 9 per cent were health sector deals. The major M&A’s in the Indian pharmaceutical sector can be summarized in the Figure below. The drugs and pharmaceutical sector has attracted FDI worth US$ 1825.43 million between April 2000 and September 2010. Industry Drivers The major growth drivers of the industry are as follows:

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2011

a. Technical Capability - In 2009, India had more than 120 US FDA-approved plants in addition to 84 UK MHRA-approved plants. This shows the ability of Indian companies to deliver quality worldwide. India ranks far ahead of most of the other countries as shown in the Figure below. b. Government Support – The GoI has extended support for the rapid approval of manufacturing and exports of formulations by reducing the approval time for No Objection Certificate (NOC) manufacturer and NOC export license from 12 weeks to 2 weeks. It has also introduced zero duty for technology upgrades in the pharmaceutical sector through the Export Promotion Capital Goods Scheme. The GoI has also signed MoUs with the US FDA, WHO, Health Canada. EMEA region, set up 7 NIPERs as institutes of national importance to achieve excellence in phar-

maceutical sciences. It is also embarking on a major multi-billion dollar initiative with 50 per cent public funding through a public-private partnership (PPP) model to harness India’s innovation capability.iii c. Cost Efficiency – The Indian market has around 8000 manufacturers driving the reduction in costs across the lifecycle of the product. The manufacturing costs in India are 65% lower than that in US and about 30% lower than that in Europe. d. Growing Global Demand for Generics – MNCs are increasingly expanding their presence in the emerging markets. Growing focus on healthcare reforms and cost reduction has also led many large global pharmaceutical players to rethink their strategies to leverage the growing potential of branded ge-

NIVESHAK

Financial analysis Larger pharmaceutical companies are shifting to new business model with greater outsourcing of discovery services, clinical research and manufacturing. Transformations in the business model spell more opportunities for Indian companies. Pharmaceutical costs are almost 50% lower in India as compared to western nations while overall R&D expenditure are about 1/8th and clinical expenses around 1/10th of western levels. Riding on better sales in the domestic and export markets, Indian pharmaceutical industry is expected to continue with its good performance. But with the possibility of further slowdown in US and European regions could dampen the growth of exports. Nevertheless, Indian pharmaceutical industry’s outlook is very strong due to the immense potential in the growth of healthcare in India. Indian pharma companies have been operationally efficient and their profits are comparable with other Emerging markets (EMs). Some key observations include: • Non-urban markets are growing at 2-3 times of urban markets. • Gross margin in rural regions are 45-50% versus 70% in urban regions. • EBITDA margin in rural regions is lower at 15% versus 25% in urban markets. • Strong balance sheet allows Indian pharma companies to expand organically and inorganically and Balance sheets of the Indian pharma companies are significantly less leveraged than that of their global generic peers.

Below are the financials of major Indian Pharma companies, which posted strong growth numbers (March 2011):

Challenges The core issues for most of the drug companies are declining productivity of in-house R&D, patent expiration of number of block-buster drugs, increasing legal and regulatory concern and pricing issue. As a result larger pharmaceutical companies are shifting to new business model with greater outsourcing of discovery services, clinical research and manufacturing. However, riding on better sales in the domestic and export markets, the Indian pharmaceutical industry is expected to continue expanding the range Company Cipla Ranbaxy Lupin GSK DBL

Total Income 12.9% 6434 19.2% 5817 21.2% 4490 13.1% 2250 15.9% 5304

EBIT -11% 1157 100% 1204 15% 890 13% 878 3% 1060

PAT -11% 960 100% 1149 25% 810 10% 564 6% 893

of generic producers as more molecule come off patent. The major challenges being faced are: • Effects of new product patent • Drug Price control • Regulatory reforms • Infrastructure Development • Quality Management • Conformance to global standards

Growth Opportunities The Indian pharma R&D expenditure as a percentage of sales is just 7.5% during the year 2009-2010 and the GoI is continuing to enhance the investments in R&D capabilities. The GoI should also step up its spend on healthcare from a current low of 1% of GDP to 3%.i The clinical trials market in India, valued at US$275 million in 2008 is expected to grow at a CAGR of about 24 per cent during 2008–2011, nearly double the global average.iii Moreover factors like the increasing Indian population, huge patient base, increasing incomes, improving healthcare infrastructure,an increase in life-style related diseases, adoption of patented products,patent expiries and aging population in the US, Europe, Japan and penetration of health insurance will propel the growth of the drugs and pharmaceutical market in India.

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nerics and the over-the-counter (OTC) drugs market. Globally, the generics segment is expected to grow to about US$ 140 billion by 2015. e. Launch of Patented molecules - With renewed confidence in the IP regime, large pharmaceutical companies are continuing with patented drug launches in India. Global innovators have secured 302 drug patents from the Indian Patent Office as of October 2008, and this number is expected to grow in the next few years. Between 2005 and 2010, the Indian Patent Office has granted 3,488 product patents. f. Rural Market Opportunities - The potential of the rural pharmaceutical market in India has encouraged many MNCs to enhance their focus on this market. The untapped Indian rural market accounts for 45 per cent of the country’s total GDP. Novartis’ rural initiative, Arogya Parivar covers 25 million people in more than 18,000 villages. Sanofi-Aventis has launched Prayas, a continuing education programme for rural doctors across India and GSK is following suit in UP.

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NIVESHAK

Banking Sector Sanjeev Kumar & Senthil Kumar Subramanian

NITIE

a couple of years new players will be entering this sector.

Introduction: Indian banking system is one of the best in the world. Reserve Bank of India, Ministry of finance and related organizations have taken significant efforts to improve the banking system in India. Indian banks can be classified into three major categories which are the commercial banks, cooperative banks and development banks. As reported by McKinsey, Indian Bankex has a CAGR of 51 % in last decade compared to the market index of 27%. Banks are principal driver of employment and GDP growth. Market capital of all the listed banks is Rs 765425 crore which is about 30 % of the market capital of Sensex. Reserve bank of India has defined empirical relation for growth of banks which is (+-2 %) then targeted nominal GDP. The profit margins of Indian banks are at par with developed nations which makes the sector attractive. Major player and segments The commercial banks can be classified into three major categories- public sector banks (27), private sector banks (22) and foreign banks (31). Banking being a regulated business, it is difficult to differentiate amongst these banks using any other parameter apart from the market share. Group mapping tool helps to identify the key market segments as shown on the next page. RBI sanctions foreign player with licenses for 3 branches to be opened in a year. There are no foreign players existing in the category of high market share in India. Government is planning to sanction more licenses to the industrial houses .RBI is in the phase of drafting the norms for the new banks. In

Current state The number of branches in India in December 2010 is 87152, a 5.6% increase compared to December 2009. In order to promote the financial inclusion in the country the RBI has allowed the banks to start the branches in Tier -5 and Tier -6 towns without its approval .RBI has also forced these banks to open 25 % of the new branches in rural towns to promote financial inclusion. The CAGR of banks for the past 6 years is 21.95 % .The deposits and advances make the key contributor to the asset and liabilities side in a bank balance sheet. Banks have classified their segment into 5 categories namely large corporate, mid corporate, small and medium enterprise, agriculture and retail. The Cumulative CD (Credit to deposit) ratio was 71.5% in 2005 .Continuously growing demand for loans from the different segments has pushed the CD ratio to 78.16 % in 2011. Large market share holders like SBI, ICICI, HDFC and Axis are operating at a CD ratio of 80%. Currently Indian banks are in the

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growth phase which is favoured by different factors like attractiveness, scope of increasing the banking network, demand for banking and maturity of regulations during economic crisis 2008. RBI decides the repo and reverse repo rate depending on the various economic factors like core inflation, food inflation, Gross domestic product(GDP),exchange rate ,NX (Net exports) and many others. The current repo and reverse repo are 8% and 7 % respectively. RBI has allowed banks to decide on their base rate and Base Prime Lending Rate (BPLR). The yield on advances (YOA) and cost of deposits (COD) are the key parameters which can differentiate one bank from others. Customers would prefer banks having higher interest rate for deposits and lower interest rate for loans. There are case studies in Project Finance where public banks have lost big corporate customers for a variance in interest rate of 5 bps in their credit products compared to private banks. RBI is planning to deregulate the saving interest rate which can result in “Interest rate War” between banks. Long term strategy of most of the banks is to increase the CASA ratio which can help them to get cheaper deposits. HDFC bank has

the maximum CASA ratio of 52.69% in March 2011. Currently term deposits are getting better customer attention because of the higher interest rate. The YOA of Kotak Mahindra bank is 14.67 and Bank of Baroda is 9.57 respectively. YOA of Private banks are higher than public sector because priority sector lending targets guidelines by RBI.

Macro Environment Analysis PEST analysis of the Indian banks can help to understand the macro environment. The Macro environment analysis helps to identify the different target areas to growth opportunities for banks. Banks should define the strategy for the next 5 years and start implementing them. Few private sector banks like Yes Bank, HDFC bank and Axis bank have formulated the strategies for growth. Currently, Yes Bank is implementing Strategy Version 2.0 where the bank targets to double its branches , increase CASA ratio, focus on non-interest income like transaction banking , financial advisory services and treasury. It has partnered with Nokia Obopay for M-commerce integration with CBS. In addition, Yes Bank is also upgrading E-commerce portal according to the changing customer needs.

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Industry Drivers and Challenges Key drivers of the Indian banking industry are given below: • Under explored retail banking in India. Around 46% of the India earning population is having bank account. RBI incentives for financial inclusion for banks • Increasing penetration of electronic and mobile medium of communication in India. • New opportunities to increase the non-interest income of banks .Recently Punjab national bank has acquired 30 % stake in Met life insurance. In Q1 FY 12 IndusInd Bank reported a higher non-interest income because of increase in third party distribution income. Challenges of Indian Banking industry is given below: • The changing regulation has made the banking market competitive with greater operational flexibility ,decontrolled interest rate and liberalized norms for foreign exchange • Strategic new product development to attract customers .South Indian bank has designed new products to attract customers for gold loan, City Union Bank has designed new products to attract savings bank loan from higher education students. • Increase the per branch productivity of branches .State bank of India has set up an exclusive vertical to work on Business Process Reengineering to reduce the operating expense of the bank • Low customer switching cost and customer retention calls for customized service and flawless delivery. • Improving the asset quality .Few research papers propose the relationship between interest rate hike and non-performing assets to be directly proportional. Recent interest rate hike puts a presaugust

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sure on the provisions head of the profit and loss statement of banks. • Diversification of sectors of lending .Recently PNB underperformed compared to its peers since it has a huge exposure to coal based power project which is projected to turn into a non performing asset. Microfinance exposure in many banks turned to NPA because of the complications created in the state of Andhra Pradesh.

Financial Analysis Banks have a different parameters compared to a manufacturing or a service firm. • NIM (Net interest margin) – NIM`s of more than 3% can be stated as good interest spread indicator. HDFC and Kotak Mahindra bank has a NIM more than 4 %. In current scenario once the RBI has gone for a rate hike these two banks have not come with any announcement of rate hike when other peer are transferring the hike to the customers immediately. • Cost to income – Cost to income ratio less than 45% can be stated as a good operating cost indicator for a bank. Cost to income ratio increases during drastic expansion of the branches. A new branch opened in a semi urban town needs 18 months for break even. IDBI bank has a minimum cost to income ratio of 35.16%. • ROA (Return on Assets) – This ratio good return indicator of the bank. Kotak Mahindra has a highest ROA of 1.85 %. Kotak Mahindra has clearly defined its strategy to achieve a highest ROA in the banking community. Kotak Mahindra bank is supported by other subsidiaries of the banks which help to contribute to the non interest income. ROE (Return on Equity) and ROA of Canara bank is 26.34 and 1.32 respectively. Canara bank likes to create a shareholder value and hold them as reserve capital.

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• Solvency Ratio- Capital Adequacy ratio (CAR) which is calculated as per the Basel -2 norms. RBI has given minimum guidelines of 9% tier -1 capital and 3 % tier -2 capital. Gross Nonperforming assets (GNPA) and Net Nonperforming assets (NNPA) are the key indicators to determine the health of the assets. New private banks have been successful in maintaining their NPAs as the lowest in the industry. To that extent, even the old banks are successful in bringing down their NPAs to acceptable levels over the past 5 years. Currently, all the banks are facing an increasing GNPA and NNPA because of rise of number of defaults due to rate hikes. Because of new provisioning norms, some banks saw their PAT getting affected by higher than usual provisions, notably SBI. RBIs norm of 70% PCR (provision coverage ratio) will in long run add to asset quality of the banks. • The scatter plot above shows the positions of various banks with respect to NIM and Cost to Income as per the FY11 statements. • Though most of the banks lay in the same area, a few banks stand out in terms of these measures which could create a huge difference in the long term. Indian Banking industry is highly regulated by RBI. • Even the market rates these new and foreign banks are significantly higher than the old banks. This is evident from the fact that the new banks have P/E of more than 20 whereas the old banks have P/E of less than 10. This trend is reflected in P/BV multiple also. The intermediation cost of Indian banks is relatively higher than its global peers

mainly due to investing in low yielding assets due to regulatory requirements. • In the current environment, banks are in greater competition to attract deposits by providing higher term deposits rates. This will also, in the short run put NIMs under pressure. In India, savings rate is regulated by RBI at 4%. RBI has come out with a discussion paper on deregulating deposit rates which is expected to raise the cost of deposits for Banks. But most bankers believe that competition won’t let them burn their fingers.

Conclusion Over the last decade or so, Indian economy has been growing at a brisk pace which has provided tremendous opportunities for Banking Universe. Banking sector has also leveraged the growth provided by the economy to the full extend and has grown at a rate of 24.5% year on year for the last 5 years. Indian banking sector is also getting globalized rapidly which is pushing the old banks to cultivate world class best practices. Because of the entry of foreign banks and new private banks, there is a great competition amongst banks for talent. The spectrum of services provided by banks has broadened because of which the existing talent pool is also undergoing major skills up-gradations. Banks have also started looking at rural branches as their main drivers of growth owing to the incentives being given by RBI. Though, further policy rate hikes are expected, banks are capable of passing the rate hikes to the customers. Because of expectations in economic slowdown coupled with higher cost of capital environment, banks would soon be under earning pressure in the near term. In the long run because of the robust economic fundamentals and protective regulations, Banking Universe is all set to grow at a faster pace and add value to shareholders and society.

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Automobile Industry

Shashank Kanodia & Mukta Sagar Rakshit

NMIMS

Evolution of the Indian Automobile industry Looking at the history when automobile manufacturing embarked in India about 60 years back, journey can be classified into 3 main phases. The first phase till mid1980s can be termed as protection for the Indian automotive industry. During this phase, there were restrictions on the manufacturing and import of automobiles. Till the end of this phase Indian automobile industry was more of a seller’s market. The Indian automotive market was the beneficiary of the following phase of liberalization beginning from 1992 that was characterized by the opening of India’s economy to foreign investment. This phase was marked by the entry of foreign automobile players of automotive financing. The Indian automotive market became a buyer’s market during this phase. The second wave of liberalization was followed by the third phase which started in the second half of the first decade of 21st century (and in continuance) could be termed as a phase of globalization of the Indian automotive industry. This phase has been marked by the removal of most import controls, entry of many more foreign players in the Indian automotive market and Indian companies gaining a global identity and acquiring foreign companies. The three phases discussed above are

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depicted in the figure below. At present Indian Automobile Industry (IAI) is the ninth largest of its ilk and makes a contribution of four percent to the nation’s GDP. However the contribution to GDP is below the global average of 10%. It is the largest two and three wheeler market in the world, second largest tractor manufacturer and fifth largest CV manufacturer in the world. The industry accounts for 5% of India’s industrial production. It contributes around 17% to total indirect tax collection of India. Given the busting population of India the auto penetration rate is a dismal 8 vehicles/1000 people. The rates in US and China are 765 vehicles/1000 people and 40 vehicles/1000 people respectively.

Major players Overall two wheelers continue to hold the majority share in terms of the automobile sales with Hero Moto Corp leading the pack. Other major players in two wheeler category are Bajaj Auto, Honda Motors, TVS Motors and Yamaha. In Commercial vehicles TATA Motors is the market leader followed by Ashok Leyland, Swaraj Mazda, Mahindra & Mahindra, Eicher Motors. Passenger vehicles segment is dominated by Maruti Udyog (46%), TATA Motors and Hyundai Motors with Honda Motors, Toyota, Skoda, and Mahindra & Mahindra looking to find their feet

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Cover Story Sectoview in this segment. The major players in the Three tural loans and schemes like NREGA and availabilWheeler category are Bajaj Auto (58%) and Piaggio. ity of more disposable income at the hands of rural people indicates a potential growth opportunity. A Industry drivers low penetration of only 8 vehicles per 1000 people Wide variety of loan schemes at affordable in- presents a tremendous growth opportunity as the terest rates by a variety of banks and FIs will encour- economy, population; disposable income and proage car purchase trends among lower middle class. pensity to spend are all expected to see a positive The action is shifting to the mid-size car segment as uptrend. The major growth drivers discussed so far the small car segment acquires a degree of stability are depicted in the figure below. in terms of price competition. Sales in the used car Challenges market is also expected to do well as more and more The drivers mentioned above also face resisolder models get replaced by newer ones at a faster tance from the challenges discussed in this section pace. Social ethos and nuclear families is another as far as the future growth and expansion of IAI is factor that will drive the sales of cars in time to come. Rising popularity of Microfinance Industry in concerned. The inflationary condition prevailing in rural India has made possible easy credit availability India is delivering a double whammy to automobile for rural populace particularly farmers for purchase industry. Rising inflation not only means less income of two wheelers and tractors. Rural income from re- with general mass to spend on luxury items such mittances (migrant population) and increase in non- as cars but it also leads to rising interest rates that farm activities such as trading and agro-processing make it difficult for the interested customers to avail are boosting non-farm income. Waiver of agricul- loan facilities for financing their vehicle purchase.

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Another cause of concern for IAI is the volatility in fuel prices. Petrol prices have already been decontrolled and government may do it for diesel in the near future. High fuel prices force consumers to think of alternate transportation means or defer purchase. An additional excise duty of Rs.80, 000 per car to be levied on diesel cars, if implemented, could adversely impact demand. 60-70% of the production cost of automobiles may be attributed to raw materials. With prices of commodity items like steel, non-ferrous, precious metals, rubber and petroleum products are expected to go up significantly the automobile may become dearer for the customers. Stringent emission norms and safety regulations could bring new complexities and cost increases for automotive industry, impacting the Company’s business. WTO, Free Trade Agreements and other similar policies could make the market, more competitive for local manufacturers. Fluctuation of exchange rates can take a hit on the profit of companies due to considerable operations in other currencies.

Macro environment The Indian consuming class, with an annual income of US $ 980 or above, is growing at a rapid rate. An increase in the number of working women in India and the prevalence of nuclear double-income families, especially in the urban areas coupled with other factors like automatic approval for equity investment up to 100% of manufacture of automobiles and component gives an optimistic look to the sector. The Automobile mission plan 2016 of the Indian govt. aims at making India a global automotive hub. The barrier to entry is high upfront capital requirement. The rise of labour unrest like the recent strike in Maruti Suzuki has been a cause of concern for this sector. Car and sports utility vehicle makers say they’re taken aback by the Union finance ministry’s proposal to bring locally assembled models into the same duty structure as imported units. They say the move would cripple demand, following a substantial rise in vehicle prices. Trends The growth of the Indian Automobile sector has been robust over the year due to increasing population and higher propensity of the people to spend. The sector is cyclical in nature and consumer driven. Last year (2010) saw a very high growth of 30% but this

year auto companies are taking a hit at their bottom line due to increasing cost of raw material.

Competition Competition in this industry is high. Competition in this industry is increasing. Automotive industry is a volume-driven industry, and certain critical mass is a pre-requisite for attracting the much-needed investment in research and development and new product design and development. Research and development investment is needed for innovations which is the lifeline for achieving and retaining competitiveness in the industry. This competitiveness in turn depends on the capacity and the speed of the industry to innovate and upgrade. The most important indices of competitiveness are productivity of both labour and capital. The concept of attaining competitiveness on the basis of low cost and abundant labour, favourable exchange rates, low interest rates and concessional duty structure is becoming inadequate and therefore, not sustainable. A greater emphasis is required on the development of the factors like innovation which can ensure competitiveness on a long-term basis. With foreign companies like Volkswagen, Fiat and Toyota focusing on the small passenger car segment, this segment is bound to face huge competition in the near future. Industry Life Cycle Currently the industry is going through Moderation phase due to tough macroeconomic conditions but is poised to return to its growth phase due to very low vehicle penetration & rising income levels in India. Going by the current levels of investments made by overseas car manufacturers in India both in Research & development and setting up of assemble plants India is poised to become an International Export hub by targeting huge growth potential in the coming decade. Outlook for the sector Short term outlook: Automobile Industry in India will have to go through a rough patch for the remaining part of fiscal year 2011-12 due to hardening of interest rates, rise in the crude oil prices and sharp increase in the prices of raw materials. The supply side constraints due to disruption of production of Japanese companies as a

.. “IAI is the ninth largest of its ilk and makes a contribution of four per cent to the nation’s GDP”

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resultant of Japan’s earthquake have eased out. The growth rate in the previous fiscal year 2010-11 was in excess of 25% is expected to moderate around 12% which is already prevalent in the present sales numbers released by SIAM. The companies which are linked to core infrastructure sector in terms of commercial vehicles are poised to attain an advantage as compared to four wheeler/two wheeler manufacturers. As per the current share price valuation, Maruti Suzuki seems to be the safest bet but its ability to generate profits is a question that has to be answered. Maruti is currently going through a rough weather wherein it’s facing capacity constraints. Once the earnings of Tata Motors international divisions Jaguar & Land Rover are taken into account it is poised to give attractive valuations. Though Tata Motors and Mahindra & Mahindra occupy a considerable share in Commercial vehicle space in India, Tata Motors will be our Stock pick in commercial vehicle sector due to its strong presence in the heavy & medium commercial vehicles and revival in sales of its international acquisitions - Land Rover and Jaguar. Also Tata Motors is in the process to launch the super solid all terrain models of their international brands which will help it attain first mover’s advantage and is poised to develop a niche market for the same.

The Indian automobile sector presents a lucrative growth opportunity in the long term. . Experts state that in the year 2050, India will top the car volumes of all the nations of the world with about 611 million cars running on its roads. On account of its huge market potential, a very low base of car ownership in the country estimated at about 25 per 1,000 people, and a rapidly surging economy, the nation is firmly set on its way to become an outsourcing platform for a number of global auto companies. According to a recent research report by Deloitte, India will be amongst the top six countries that will dominate the automobile industry by 2020 with the turnover reaching ~122-159 USD by 2016. . A commendable job by Government of India was the creation of specific benchmarks in the form of “terms of reference” in 11th five year plan pertaining to the automotive industry. The government has also executed prudence by setting up Auto Skills Development Council to look at sustainable development with an emphasis on monitoring carbon footprint. Better land acquisition, labour laws and fuel policy is the need of the hour. Manufacturers who can innovate with fewer resources, smaller carbon footprint and higher consumer sensitivities may look forward to a prosperous future.

Long term prospects: Trailing TTM financial figures Ratios Price Earning (P/E) Price to Book Value ( P/BV) Price/Cash EPS (P/CEPS) EV/EBIDTA Market Cap/Sales ROCE (%) ROAE (%) EBITDA Margins (%) Beta with respect to BSE Sensex Beta with respect to NSE Nifty

11-Mar M&M 16.66 4.16 14.35 11.51 1.7 28.5 27.7 14.6 1.1987 1.1837

11-Jun Bajaj Auto 14.28 8.29 13.7 8.79 2.29 68.9 66.7 19.4 0.74 0.7369

11-Jun Maruti 14.11 2.41 9.88 8.05 0.82 30.7 17.6 9 0.8193 0.8219

11-Jun 11-Mar Hero Motor Ltd. Tata Motors 18.19 40.95 12.68 3.96 14.12 24.03 11.67 19.71 1.7 1.53 59.4 25.9 62 65.3 12.8 14.4 0.5382 1.2624 0.5333 1.2613

Cover Story Sectoview

Year 2008-09 2009-10 2010-11 Sales Production Sales Production Sales Production Category Passenger Vehicles 1,552,703 1,838,593 1,951,333 2,357,411 2,520,421 2,987,296 416,870 532,721 567,556 676,408 752,735 Commercial Vehicles 384,194 349,727 497,020 440,392 619,194 526,022 799,553 Three Wheelers 7,437,619 8,419,792 9,370,951 10,512,903 11,790,305 13,376,451 Two Wheelers 9,724,243 11,172,275 12,295,397 14,057,064 15,513,156 17,916,035 Total

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Telecom Sector Anshul Mehta & Pranshu Srivastav

IIT Delhi Introduction Telecom sector plays a very vital role in the socio-economic development of any nation and India is no exception. India’s telecom sector has witnessed a phenomenal growth during the last few years and is poised to take a big leap in the future also. Since the time of National telecom policy 1994, to the recent times of Mobile number portability, the telecom sector has surpassed all imaginable bounds of growth. Either it is the employment provided to millions or the reduction of the distances, the economic and social impact of telecom on our society is huge. Over just a short span of few years, the sector has changed completely, both in terms of coverage, efficiency and variety of services offered. Major Players The major players can be shown segment wise. The top service providers, along with their market shares at the end of May’11 are shown with the pie-chart. Bharti Airtel with close to 20% share is the biggest service provider, followed by Reliance and Vodafone. Private operators hold 88.30% of the wireless market share where as BSNL and MTNL, two PSU operators hold only 11.70% market share. The top players in the telecom equipment manufacturing sector, includes the names like AGC Networks, Alcatel-Lucent, Bharti Mobile, GTL, HFCL, HTL, ITI, NELCO, S Mobility, etc.

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Current state With a quarterly growth rate of close to 7.5% and the annual addition of more than 220 mn customers, India is the world’s fastest-growing cellular market. India is also the 2nd largest telecom market in the world, second only to China. The table summarizes the industry data till the end of May’11. Industry Concentration The current tele-density stands at 73.11% with the urban market more than 150% penetrated. Out of this 73.11%, 70.23% is accounted for by the wireless segment only. For wireless, every two connections in the urban market correspond to one in the rural; while the ratio of the same for the wireline is three to one, demonstrating clearly higher acceptance and ease of deployment of the wireless compared to other. On account of high capital investments required in setting up a nationwide network, the PSUs hold a dominant position in the wireline space. Price Competition: India is a country with the lowest telecom rates in the world. These fiercely cut tariffs are taking a toll on the sector profits. During the last two years, profits and revenues of Indian telecom companies have suffered, with tariffs as low as, less than one

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Total subscribers Urban subscribers Rural subscribers Total tele-density Urban tele-density Rural tele-density ARPU for GSM ARPU for CDMA

874.68 mn 580.62 mn 294.07 mn 73.11% 161.37% 35.15% Rs. 100 Rs. 66

plans by 20%, in 6 circles of its operation. Tata Docomo has also hiked the prepaid tariffs in Tamil Nadu. The other major operators are also expected to follow suit soon. Industry Capacity While the Urban Tele-density already exceeds 150%, the rural tele-density is still close to 33%. In cities, for every 2 individuals there are 3 mobile numbers and in rural areas, there is 1 mobile number for every 3 individuals. With the saturation of the urban market, companies have put in great efforts to tap in the only 35% penetrated rural markets. Rural mar-

ket, with growth of 2.15% continues to outperform urban wireless telecom which grew by 1.34%. The companies are looking for options like infrastructure sharing to reduce the very high installation costs in the rural areas. Non-voice services and VAS can be the revenue drivers in the current market. It is expected that 3G and BWA will increase the demand for data and content based services such as cloud computing, remote surveillance, fleet management and retail supply chain. Services such as mobile TV, mobile banking and mobile governance are also expected to witness a higher demand in future. Companies have also realised these huge opportunities and are putting in great efforts to develop content of practi-

Cover Story Sectoview

US cent a minute. In the month of May, Indiaâ&#x20AC;&#x2122;s biggest operator Airtel, reported a 31% dive in the quarterly net profits from a year earlier. However, the companies are making a move to get out of this self destructive price war and the pressure on the sector is expected to abate. In the month of July, Airtel hiked the prices of few of its

cal value, so as to substantiate the falling ARPUâ&#x20AC;&#x2122;s (Average Revenue per User) with increased earnings. Industry Lifecycle: The rural and the urban industry are in the different phases of the life cycle. While the urban market is in the maturity stage, the rural market is still in the growth stage. Companies are planning big to capitalise on the vast Indian rural market. The ARPU is at an all time low, and companies are investing huge in non-voice services to check this decline. With the now available 3G, VAS is seen as the industry driver that can break this urban market saturation, emulating the NTT Docomo story of the Japanese market. Macro & Micro Environment Over the past two decades, the Indian telecom sector underwent a huge transformation, evolving from a monopolistic to a highly competitive, productive and an increasingly innovative sector. The regulatory framework has played a pivotal role in shaping the Indian telecom sector, the way we see it today. TRAI (Telecom Regulatory Authority of India) till date has successfully accomplished its objectives of protecting the consumers and stirring the competition in the market. Though, National Telecom Policy 1994 and 1999 have laid an overall framework for the industry, they failed to achieve their objectives in totality. And this has raised a digital divide amongst the rural and urban areas. This financial year, govt. plans to raise money through recurring license fees and other usage charges from the telecom sector, a move which will put an additional financial burden on the service providers. In future also, the government policies will have a decisive role in determining how the future of the sector will look like. In the upcoming National Telecom Policy 2011, Mr. Kapil Sibbal is supposed to deal with many contentious issues like M&A, spectrum trading, MVNO, green telecom etc. Talking of the micro environment, companies are most hurt by the prevailing price war, declining profits, sky high debts and a pesky stock market. The huge amount of money spent in procuring the 3G auction, has strained the balance sheets of a lot of

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companies. With the new entrants fighting hard with past. the biggies to grab a chunk in the market share, the • With this astonishing rate of growth, India will competition is expected to stiffen, and survival in soon be touching the 1 billion subscriber mark, such times will mean leaner and agile organizations. in a year or two. Competitive Analysis • The overheated competition in the sector, will The telecom sector is fortunate to have a true lead to a few mergers and acquisition activities competition in terms of market share and subscribin the nearby future, after which an entirely new ers. While currently Airtel leads with the maximum sector structure will emerge. number of subscribers, it is Vodafone that showed • With the price war taking a toll on the compathe maximum additions in the recent quarter. ny’s profit, we can expect to see the price hikes Introduction of MNP has made this sector even by a number of operators, anywhere between more competitive, with every operator striving to 10 to 20%. retain their customers and reduce the churn outs. • Value added services, touted as the next big The companies, who are not able to meet the QoS thing in telecom, will see a lot of innovations (Quality of Service) standards, will be at the receivhappening, creating a demand for the regional ing end. This will force the companies to offer better content. services to the customers, thus leading to improved • M-commerce after the full fledged deployment QoS for the whole sector. will serve the government’s dream of financial By the end of May 2011, about 105.70 lakh subinclusion for all. scribers have submitted their requests to different • With Reliance backed Infotel being awarded with service providers for porting their mobile number. the pan India BWA license in the recent auctions, The maximum number of requests pertains to Guthe broadband space will get a huge push. jarat, where a whopping 10,52,582 requests were • In the wireline segment, Broadband is expected made for porting till the month of May’11. to push growth and check the declining numFuture Outlook bers. Many exciting things like 3G, Broadband wireless access (BWA), and Mobile Number Portability (MNP) are happening in the sector, ensuring that the future will be equally or even more interesting than the Industry drivers and challenges

asasasa • • • • •

Advent of 3G and BWA Huge potential of m-Commerce Unexplored VAS markets Presence of positive regulatory framework Growing economy resulting in better lifestyle of people • Tremendous scope in rural markets • Improvements literacy standards in India august

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• • • • • • •

Dwindling profit margins Lack of support for manufacturing sector Scam ridden industry (2G scam) Steeply declining ARPU Very less efficient spectrum use Lack of consumer awareness for VAS Very high market competition

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Financial Analysis

Key Financial Ratios of Year Debt-Equity Ratio Long Term D/E Ratio Current Ratio PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) ROCE (%) RONW (%)

The Telecom Service Sector over the years 2010 2009 2008 2007 2006 2005 2004 0.35 0.31 0.32 0.29 0.26 0.27 0.34 0.3 0.21 0.25 0.25 0.22 0.24 0.29 1.22 1.3 1.33 1.36 1.28 1.2 1.01 39.53 32.96 39.23 40.81 40.54 40.3 42.29 19.03 16.76 21.11 21.27 19.86 17.2 18.1 35.12 27.82 35.45 37.45 36.65 37.83 39.35 35.91 26.23 32.85 35.6 36.42 41.77 33.95 15.41 10.03 14.73 16.06 15.74 18.67 9.75 9.72 7.35 10.64 10.95 9.37 8.25 8.43 10.11 5.97 9.78 10.77 9.34 10.87 6.76

2003 0.36 0.33 1.01 34.8 6.99 30.36 28.08 0.27 3.07 0.18

2002 0.36 0.34 1.04 45.08 19.64 40.95 37.48 12.05 9.2 7.92

2001 0.39 0.38 1.1 37.86 15.7 34.13 31.52 9.36 11.32 8.98

Conclusion The Indian telecom sector, after shaping India’s growth story for more than a decade, still looks strong; strong enough to push the giant for years more on the paths of prosperity. With markets still untouched, opportunities still huge and trends still in favour, the India telecom industry is all poised to create another growth story.

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FMCG Sector Gaurav Arora & Abinash Kumar

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai

Executive Summary A quick turnover, relatively low cost and annual product replacements mark the Fast Moving Consumer Goods (FMCG) sector. Soaps, detergents, toiletries, tooth cleaning products and shaving products are some examples of frequently purchased consumer products. FMCG may also include glassware, chocolate bars, packaged food products, soft drinks, tissue paper, bulbs, batteries, paper products, and plastic goods. Being the fourth largest sector in the economy, FMCG creates employment for more than three million people in downstream activities spanning across Household Care, Personal Care to Food & Beverages. The total FMCG market is in excess of US$ 13.1 billion. It is currently growing at a double digit growth rate and is expected to maintain this growth rate in the future. FMCG Industry is characterized by a well established distribution network, low penetration levels, low operating cost, lower per capita consumption and intense competition between the organized and unorganized segments. The US$ 13.1 billion Indian FMCG industry is expected to register a healthy growth in the third quarter of 2011-12. As it is meeting the every-day demands of consumers, it will continue to grow despite the inflationary concerns. In the last two months, input costs have come down and this will reflect in Q3 and Q4 results. Market share movements indicate that companies such as Marico Ltd and Nestle India Ltd, with domination in their key categories, have outperformed peers in their segments. This has been also aided by the lack of competition in the respective categories. Single product leaders such as Colgate Palmolive India Ltd and Britannia Industries Ltd have also witnessed strength in their august

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respective categories, aided by innovations and strong distribution. Strong players in the economy segment like Godrej Consumer Products Ltd in soaps and Dabur in toothpastes have also posted market share improvement, with revived growth in semi-urban and rural markets. The FMCG sector is an attractive sector in the time of weakness in the overall markets and has also registered a robust growth rate. Aggregate sale of FMCG industry is Rs 24,163 crore at present. SWOT Analysis Strengths: • Relatively low operational costs • Presence of established distribution networks in both urban and rural areas • Presence of well-known brands in FMCG Sector Weaknesses: • Lower scope of investing in technology and achieving economies of scale, especially in small segments • Low exports levels Opportunities: • Lower penetration level at the rural markets • Growing income levels, i.e. increase in purchasing power of consumers • Huge domestic market- a population of over 1.21 billion • Untapped export potential • High consumer goods spending behaviour Threats: • Removal of import restrictions resulting in replacement of domestic brands • Proliferation of “Me-too” products, which illegally mimic the labels of the established brands

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Godrej with a market share of 3%. The Skin Care segment is expected to register a growth rate of more than 16%. Hair Care The hair care market in India is estimated at around Rs. 3,800 Cr. The hair care market can be segmented into hair oils, shampoos, hair colorants & conditioners, and hair gels. Marico is the leader in the Hair Oil segment with a market share of 33% while Dabur occupies the second position at 17%. The coconut oil market accounts for 72% share in the hair oil market. In the branded coconut hair oil market, Marico (with Parachute) and Dabur are the leading players. The market for branded coconut oil is valued at approximately US$ 174 million. Shampoos The Indian shampoo market is estimated to be around Rs. 2,700 Cr. It has the penetration level of only 13% in India. Sachet makes up to 40% of the total shampoo sale. It has low penetration level even in metros. Again the market is dominated by HUL with around 47% market share while P&G occupies the second position with a market share of around 23%. Antidandruff segment constitutes around 15% of the total shampoo market. The market is further expected to increase due to increased marketing by players and availability of shampoos in affordable sachets. Oral Care The oral care market, especially toothpastes, remains underpenetrated in India (with penetration level below 45%) due to lack of hygiene awareness among rural markets. The industry is very competitive both for organized and smaller regional players. The

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• Slowdown in rural demand • Tax and regulatory structure Industry Category and Products Household Care Personal Wash The market size of personal wash is estimated to be 10% of the FMCG market share for FY 2011-12 at US$ 989 million. The personal wash segment can be segregated into three subsegments: Premium, Economy and Popular. The penetration level of soaps is 92%. It is available in 5 million retail stores, out of which, 75% are in the rural areas. HUL is the leader with market share of 53%; Godrej occupies second position with market share of 10%. With increase in disposable incomes, growth in rural demand is expected to increase because consumers are moving up towards premium products. However, in the recent past there has not been much change in the volume of premium soaps in proportion to economy soaps, as the recent increase in prices has led some consumers to look for cheaper alternatives. Hindustan Unilever Limited is the biggest producer of Personal wash and detergents. The segment is expected to grow by more than 10% this year. Detergents The size of the detergent market is estimated to be Rs. 12,000 Cr. Household care segment is characterized by high degree of competition and high level of penetration. With rapid urbanization, emergence of small pack sizes and sachets, the demand for the household care products is flourishing. The demand for detergents has been growing but the regional and small unorganized players account for a major share of the total volume of the detergent market. In washing powder HUL is the leader with 38% of market share. Other major players are Nirma, Henkel and Proctor & Gamble. Personal Care Skin Care The total skin care and cosmetics market is valued at US$ 274 million. The skin care market is at a primary stage in India. With changing life styles, increase in disposable incomes, greater product choice and availability, people are becoming aware about personal grooming. The major players in this segment are Hindustan Unilever with a market share of 54%, followed by CavinKare with a market share of 12% and

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penetration level of toothpowder/toothpaste in urban areas is three times that of rural areas. This segment is dominated by Colgate-Palmolive with market share of 49%, while HUL occupies the second position with a market share of 30%. In toothpowders market, Colgate and Dabur are the major players. The oral care market, especially toothpastes, remains under penetrated in India with penetration level 50%. Food & Beverages Food Segment According to the Ministry of Food Processing, the size of Indian food processing is around US$ 65.6 billion including US$ 20.6 billion of value added products. Of this, the health beverages industry is valued at US$ 230 billion, bread & biscuits at US$ 1.7 billion, chocolates at US$ 73 million and ice-creams at US$ 188 million. The size of the semi-processed/ready to eat food segment is over US$ 1.1 billion. The food category has also seen innovations like softies in ice creams, ready to eat rice by HUL and pizzas by both GCMMF and Godrej Pillsbury. Tea This is perhaps the only industry where India has retained its leadership over the past 150 years. With a turnover of more than Rs. 9,000 crore, the major share of tea market is dominated by unorganized players. More than 50% of the market share is captured by the unorganized players. Leading branded tea players are HUL and Tata Tea. Coffee The Indian beverage industry faces over supply in segments like coffee and tea. However, more than 50% of the market share is in unpacked or loose form. The major players in

this segment are Nestlé, HUL and Tata Tea. Growth Prospects • Large Market India has a population of more than 1.21 Billions which is just behind China. According to some estimates, by 2030 India population will be around 1.450 Billion and will surpass China to become the World largest in terms of population. FMCG Industry which is directly related to the population is expected to maintain a robust growth rate. • Spending Pattern An increase is spending pattern has been witnessed in Indian FMCG market. There is an upward trend in urban as well as rural market and also an increase in spending in organized retail sector. An increase in the disposable income of households mainly because of increase in the number of nuclear families where both the husband and wife are earning has led to this above average growth rate in FMCG goods. • Changing Profile and Mind Set of Consumer People are becoming more conscious about health and hygiene. There has been a change in the mind set of the Consumer and their new mantra is “Money for Value” rather than “Value for Money”. Consumers are switching from economy to premium products which can be seen through the sharp increase in the sales of packaged water and water purifiers. A recent survey by A. C. Nielsen shows that about 71% of Indians take notice of packaged food labels containing nutritional information compared to 59% two years ago. Advantages to the Sector • Governmental Policy Indian Government has enacted policies aimed at attaining international competitiveness through lifting of the quantitative restrictions, reducing excise duties, foreign investment and food laws resulting in an environment that fosters growth. 100% ex-port oriented units can be set up by government approval and use of foreign brand names is now freely permitted.

There has been a change in the mind-set of the Consumer and their new mantra is “Money for Value” rather than “Value for Money” august

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Cheap labor and quality product & services have helped India to have a cost advantage over other Countries. Even the Government has offered zero import duty on capital goods and raw material for 100% export oriented units. Multi-National Companies outsource to their Indian operations to have a cost advantage. India is the largest producer of livestock, milk, sugarcane, coconut, spices and cashew apart from being the second largest producer of rice, wheat, fruits & vegetables. The easy availability of raw materials add to this cost advantage. Sectoral Opportunities Major Key Sectoral opportunities for Indian are mentioned below: • Dairy Based Products India is the largest milk producer in the world, yet only around 15% of the milk is processed. The organized liquid milk business is in its infancy and also has large long-term growth potential. Investment opportunities exist in value-added products like desserts, puddings too. • Packaged Food Only about 10-12% of output is processed and consumed in packaged form, thus highlighting the huge potential for expansion of this industry. • Oral Care The oral care industry, especially toothpastes, remains under penetrated in India with penetration rates around 50%. With rise in per capita incomes and awareness of oral hygiene, the growth potential is huge. Lower price and smaller packs are also likely to drive potential sales. • Beverages Indian tea market is dominated by unorganized players. More than 50% of the market share is capture by unorganized players highlighting high potential for organized players.

India is the largest milk producer in the world, yet only around 15% of the milk is processed

Cover Story Sectoview

• Central & State Initiatives Recently Government has announced a cut of 4% in excise duty to fight with the slowdown of the Economy. This announcement has a positive impact on the industry. But the benefits from the 4% reduction in excise duty are not likely to be uniform across FMCG categories or players. The changes in excise duty do not impact cigarettes (ITC, Godfrey Phillips), biscuits (Britannia Industries, ITC) or ready-to-eat foods, as these products are either subject to specific duty or are exempt from excise. Even players with manufacturing facilities located mainly in tax-free zones will also not see material excise duty savings. Only the large FMCG-makers could gain on excise duty cut. • Foreign Direct Investment (FDI) Automatic investment approval (including foreign technology agreements within specified norms), up to 100% foreign equity or 100% for NRI and Overseas Corporate Bodies (OCBs) investment, is allowed for most of the food processing units except malted food, alcoholic beverages and those reserved for small scale industries (SSI). There is a continuous growth in net FDI Inflow. There was an increase of about 150% in Net Inflow for Vegetable Oils & Vanaspati for the year 2008. Market Opportunities • Vast Rural Market Rural India accounts for more than 700 million consumers, or ~70% of the Indian population and accounts for 50% of the total FMCG market. The working rural population is approximately 400 million and an average citizen in rural India has less than half the purchasing power of his urban counterpart. Still there is an untapped market and most of the FMCG Companies are taking different steps to capture rural market share. The market for FMCG products in rural India is esti-mated to be penetrated by 52% and this is projected to touch 60% within a year. Hindustan Unilever Ltd is the largest player in this market and has the widest coverage. • Export - “Leveraging the Cost Advantage”

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Power Sector Rahul Jayasankaran, Amandeep Singh & Ravisha Kumar

Indian Institute Of Foreign Trade

Introduction The Power sector contributes directly and heavily in the growth of a country’s fortunes whether we consider IIP, HDI, GDP growth. Electricity is a social necessity as it gives a measure of satisfaction of people of a country, and is a very important and useful indicator of a country’s drive forward. In terms of power generation, India is the sixth largest in the world. With India GDP projected to grow between 7-10% in next few years, energy requirement is expected to grow at the rate of 5.6-6.4%. The per capita energy consumption was at 733.54 kilowatt in the year 2008-2009. The Government of India has set the target ‘Power for all by 2012’ to meet with the energy requirement of the entire country, by adding 78,000 MW of installed generation capacity by 2012.Demand for electricity is expected to be above 950,000 MW by 2030. Major Players With so much emphasis being placed upon the importance of power in any economy, it is quite natural that there will be a fierce competition in

Growth in Power generation vs Growth in GDP Source: www.moneyworks4me.com

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the sector, pertaining to generation, transmission and distribution of power. Such is the case with the Indian power sector as well, with a host of companies and business houses sharing a chunk of the huge pie. These players are from both the PSUs and the private sector businesses. Some examples are NTPC, Reliance Power, Tata Power, Adani, and smaller players like NHPC, DVC and many state electricity boards. Major Segments within the sector Any analysis of power generation by various resources has to start with a broad categorization of the various power resources. For the longest time, non-renewable resources have had a dominant share in the share of power generated, with coal being the winner hands down (India being 4th largest producer of Coal). Renewable resources are also an attractive market, but are still very much in their infancy in India. Hydroelectricity, for all intents and purposes, is a different segment altogether, and nuclear power is making quite a head way in the non-renewable segment. Another way to categorize the power generated is to divide it into which sector is involved in production. Such a division gives rise to three broad categories, namely, the central sector, the state sector, and the private sector. It is a division based on the ownership of the means of production, which becomes a basic way of categorization.

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Cover Story Sectoview

Current State Installed Capacity

Sector State Sector Central Sector Power Sector Total

MW 82,596.58 55,572.63 38,821.19 1,76,990.40

% age 46.66 31.39 21.93 100

Industry Concentration The power sector in India is spread throughout the country, with every large state having a power plant producing electricity, either by coal or other resources. Maharashtra has the largest installed capacity among any state in the country, closely followed by Gujarat and Tamil Nadu. Development of UMPPs(Ultra Mega Power Project) have been identified as a thrust area by Govt. of India which can eventually shift demographic power equation in India. With Indiaâ&#x20AC;&#x2122;s first UMPP being installed at Mundra(4000MW) and other UMPPs like Krishnapatnam and Cheyyur in Tamilnadu, Kudgi in Karnatka, Tilaiya in Jharkhand, major churning in different state capacities can be expected. Trends Over the last few years, the power sector has seen a growth in the power produced by renewable sources of energy namely wind energy, solar energy, and tidal energy. This is a good trend insofar as power generation is concerned, with investment being the only deterrent.

Pricing Power/Price Competition With the introduction of Tariff based competitive bidding from January 2011, the Govt. has tried to increase competition to bridge inefficiencies ,remove bottlenecks and promote availability of power to Indian consumer at affordable price. According to tariff based competitive bidding, contract is awarded on the basis of the lowest bid / unit of power as opposed to power purchase agreements, negotiation based agreements earlier. Recent govt initiatives to promote UMPP(ultra mega power projects of 4000 MW at cost of 16000Cr) are

ÂŠ FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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based on this scheme. Competitive bidding is expected to bring transparency, low cost electricity to Indian consumers and will offset the advantages of players like NTPC. Industry Capacity India’s current installed power capacity stands at 176,990.40 MW, of which a whopping 65.34% is contributed by thermal power plants, comprising of coal, natural gas and oil based power plants. To meet its ever-growing demands, India has decided to add another 77GW of installed generation capacity by the end of 2012, which it is likely to miss. India is expected to have a demand of around 950,000 MW by 2030, which would require a massive expansion and investment drive on the part of all the players in the power sector. India’s hydro power generation potential is worth 150000 MW of which only 25% have been utilized so far. Market Share Stability Due to opening up of power sector after 2003 Electricity act, and Govt’s thrust towards infrastructure development ,more and more private players both domestic and global are looking for a headway. In the last two years private players like Reliance Power, Adani Power, Tata energy has accounted for bulk of capacity addition. So market share of state run company NTPC is going down and private sector company’s market share is surging ahead .Adani plans to have a market share of more than 20% by 2020. New players such as Dainik Bhaskar, Moser Baer, and Visa Power are emerging fast considering the future power scenario and lucrative opportunities. Industry Lifecycle The power sector in India has grown rapidly over the years. Considerable growth has been witnessed in all the sectors such as thermal (3.82 per cent), hydroelectric (9.97 per cent) and nuclear (40.94 per cent). As per the 11th Annual Plan, , the overall achievement growth in the year 2010-11 has been around 5.56 per cent. A new working group was formed for further development of the sector, according to the report released by the Planning Commission dated March 4, 2011. The objective of this group is to make the power supply sector more productive and healthy. The group was chaired by the secretary for power, Government of India, power ministry and also members of other ministries. Other notable representatives from private corporate power companies also formed an important part of the group. The power sector in India has a bright future and a variety of recent investments have been made both

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by private and government sector enterprises. The government of Madhya Pradesh has invited Reliance power to go ahead with the purchase agreement of its Chitrangi power plant project, according to a recent report released on July 16, 2011. The total estimated power generation from the project stands at 3,960 MW. Apart from this, Reliance power is also focussing on projects in Krishnapatnam (Andhra Pradesh) and Tilaya (Jharkhand). Macro and Micro Environment Various economical, political, technological, ecological, socio-political legal factors affect power sector. With per-capita energy consumption expected to increase to 1000KWH and govt. mission of “Power to all by 2012”, there are abundant opportunities to be exploited. But low power plant efficiency (35%), poor variety of coal, stringent emission norms, environment protection and safety laws are some of the factors that need to be dealt with. Micro environment factors that this sector faces is low competition rivalry, low threat of entry (considering enormous investment for long periods), high threat of substitutes, supplier’s high bargaining power. With the introduction of the Electricity Act 2003 and the notification of the National Electricity Policy 2005, Indian and global private players have started penetration in to this sector aggressively. Import duty on power generation equipments has been reduced which has added to the woes Indian power equipment producers like B.H.E.L. Companies like G.E and Areva T&D are vying for investment in nuclear sector owing to GOI initiative to increase the share of Nuclear power in total power generation. Govt has set a target to attract FDI of Rs 500 billion in Infrastructure .With the power sector at the helm of infrastructure development has made various players like G.E., Doosan to look for Joint Ventures and collaborations with Indian companies. Chinese players known for faster delivery and meeting commitments have been one of major power generation equipment supplier in recent years, aided by Govt. of India’s policy. With power generation companies finding it difficult to guarantee fuel supplies for future, the sector has become more volatile and challenging. With the introduction of Tariff based bidding from January 2011, the completion for delivery of power at low cost has increased which may affect state entities like NTPC heavily in upcoming future. So far Reliance energy has bid for the lowest cost/unit electricity which is 40% lower than what NTPC has been able to quote after various cost reduction.

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plants. Due to low calorific values of Indian coal (bituminous, lignite),we have to import a lot of coal from countries like Indonesia, Australia and the US. The Ministry of Power, in association with the Central electricity authority and Power Finance Corporation, has launched an initiative for the development of coal-based UMPPs in India. A major chunk of future power plants will be based on Supercritical Technology which is still not fully developed in India. Indian power equipment manufacturers are heavily dependent on Foreign Technology suppliers for technology transfer. India’s hydro power generation potential is worth 150000 MW of which only 25% have been utilized so far. India has rich resources of thorium but lacks technical expertise to generate power from it. Enriched nuclear fuels e.g. uranium has supply constraints. Global downturn which resulted after sub-prime lending crisis in 2008, rising inflation, uncertain political conditions, decreasing investor’s confidence has affected the FDI inflow in power sector. According to latest data released by Department of Policy and Promotion, India invited $1252 million of FDIs, a 12.8% decline compared to $1437 million registered previous year. Competitive Analysis NTPC has unmatched project execution expertise having installed more than 33000MW capacity in India. But being a PSU, purchasing policies, bidding route, rules, checks and balances, limited financial capital (ceiling) deter it from taking giant strides. On the other hand firms like Adani Power, Reliance Power, can expand more aggressively and are better placed in managing financial resources, order placing, and cost competitiveness. At the same time, these are comparatively younger players with limited technical expertise, project execution skills which can prove detrimental to their

Cover Story Sectoview

Industry Driver and Challenges Some of industry driver’s are mentioned below:• India’s population of 1.2 billion which is growing at 1.344% year on year, increasing spending power of Indian consumers and technological advancements • Provision of income tax holiday for a block of 10 years in the first 15 years of operation and waiver of capital goods’ import duties on mega power projects (above 1,000 MW generation capacity) • Relaxation on import duties for Power generation equipments • 100 per cent FDI is permitted under the automatic route for generation and transmission of electric energy produced in hydro-electric, coal/ lignite-based thermal plants, oil-based thermal plants and gas-based thermal plants • The government has also taken up some ambitious programmes like the Ultra Mega Power Projects (UMPP), Rajiv Gandhi Grameen Vidhyutikaran Yojana (RGGVY), Accelerated Rural Electrification Programme and the goal of Power for All by 2012 among others, to rapidly increase the installed capacity. Challenges Ahead India faces innumerable challenges that result from the gap between what is planned versus what the power sector is able to deliver. There have been heavy shortages of power generation equipments. Challenges around logistics, work front availability, inadequacy of skilled labour,political interference,land aquisition , enormous delays in enviornment clearance are the major deterrents in capacity addition. One of the most important issue has been guaranteeing future coal supply for power

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growth in the long term. Financial Analysis With India looking for a capacity addition of more than 85000MW in the 12th five year plan, market size will grow by 3.4 lakh crore rupees. India’s total investment in green energy projects such as solar, wind and mini-hydel projects adds up to $4 billion in 2010, according to a US research paper. According to Boomerang, China hiked its investment to $54.4billion in 2010, up 39 per cent over the last year. India attracted FDIs worth $1252 million in the year 2010. Future Outlook & Conclusion At present, the energy shortage in the India is ~10% but in some states figure is as high as 25%. To combat this, over 78,000 MW of new generation capacity is planned in the next five years. A corresponding investment is required in Transmission and Distribution networks. The Indian Ministry of Power has set a goal, “Mission 2012: Power for all” and released a comprehensive sector development blueprint. The main objectives, in addition to providing 100% access to power, are to provide sufficient power to achieve targeted GDP growth rate of 8%, provide reliable and good quality power and to enhance commercial viability. Opportunities of Foreign Direct Investment (FDI) in the Power Sector in India exist in Hydro Projects, Captive Power, Ultra Mega Power Projects, Nuclear Power, National Grid Program, Rural Electrification, Renewable energy. With India’s signing of nuclear pact with US, France, Russia, India is anticipated to leverage around 20-25 % power from Nuclear energy as opposed to 2-3 % currently. Companies like Areva, GM are vying for these future opportunities. RIL and BHEL are going for expansion on their solar cell plant. A huge capital investment of about US$ 200 billion is required to meet Mission 2012 targets. This has welcomed numerous global companies to establish their operations in India under the famous PPP (public-private partnership) programs. Considering the future growth prospects, there is a vast number of opportunities to be exploited in upcoming years.

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Fin Q Results July 2011

1. Fixed Assets + Current As

sets – Current Liabilities 2. Mark to Market Margin 3. NSEIL 4. Stop Loss Order 5. Loss of Rs. 10,000 6. 13.98%a 7. Client 8. Better holding capacity 9. Exchange 10. 350 units 11. Continuous Market

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Ronak Ram, Saichand & Sriharsha

NMIMS T h e the most which has over the past shine sector, troversies potenpro-

Indian Telecom Sector is one of dynamic sectors in the country witnessed an explosive growth few years. From being the sunit was marred with several conwhich brought down the true tial that this sector vides to the Indian economy. This report will give the insights about where the sector is heading by providing in-depth analysis about the technological changes and its subsequent impact on the revenues and financial performance for industries in this sector. The beginning of telecommunication services in India can be traced back as early as 1850 when the English established the first telegraph line between Kolkata and Diamond Harbour. Since then there has been marked advances in the field through traditional wireline, optical fiber and satellite channel. During the 1980’s Indira Gandhi tried to bring in foreign participation in this space by signing up a contract with Alcatel to deploy wireline services at an accelerated pace in the country. But this led to huge political opposition and did not materialize. It was during this time that Sam Pitroda, who was one of the revolutionaries in Telecom space was invited to India and started the Center for Development of Telematics (C-DoT). Rajiv Gandhi carried on the with the good work and

went on to establish various public sector units like the Department of Telecommunication, Videsh Sanchar Nigam Limited (VSNL) and Mahanagar Telecom Nigam Limited (MTNL). During the Liberalization era the New Telecom Policy was introduced which saw the foray of foreign telecom players in India. But still they could only hold up to 49% stake in a domestic service provider. By then the first mobile telephony services had started in 1995. In early March 2000, the telecom sector truly opened up by raising the permissible stake of a foreign telecom player to 74%. This eventually led to an oligopolistic market structure where tariffs were hugely reduced and the common man could afford mobile phone which was once considered a luxury. In 2001 the 2G spectrum auction resulted in Rs. 1651 Cr. revenue to the exchequer and saw the full fledged launch of mobile services across the country. Bharat Sanchar Nigam Limited (BSNL), established in 2000, was one of the primary players and had a huge advantage compared to other private players primarily due to the Government backing. MTNL was the other Government player in this space and had operations in Delhi and Mumbai. During the course of time the country witnessed the rise of various other telecom players like Vodafone, Reliance, Tata and Bharti Airtel. Current State In 2008, the telecom minister A Raja went on to launch a second round of auctions for the 2G spectrum which eventually sparked off a controversy. The new spectrum was given away at the 2001 auction price on a first come first serve basis. Unitech Wireless, Loop Telecom, Etisalat DB Telecom India Pvt. Ltd, Sistema Shyam TeleServices Limited and S Tel Pvt. Ltd were the new players who acquired the 4.4 MHz bandwidth. Having gained a piece of the pie in one of world’s fastest growing telecom markets, these players went on to dilute their stakes. The DB Group-promoted Swan Telecom (now Etisalat DB) sold a 45% stake to UAE-based Etisalat for $900 million (around Rs4,000 crore); Sanjay Chandra-promoted Unitech Wireless sold 67% in its telecom venture to Norway-based Telenor ASA

Cover Story Sectoview

Telecom Sector

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for $1.1 billion. The result was a continuously decreasing profit margin and overcrowding of Telecom space. With as many as 14 players in 22 circles using the spectrum and ARPUs below $4, the market was getting saturated. The situation was further aggravated by the stringent regulations imposed by TRAI. It prohibited telecom operators from acquiring more than 10% stake in any other operator who competed in the same circle thereby preventing consolidation of smaller players. The large number of players also led to spectrum crunch which resulted in decrease in quality of service. Most large markets such as the US, Japan and Brazil, have a maximum of 4-5 operators. Aggressive tariff schemes like per second billing introduced by Docomo forced the others to follow suit which eventually led to pressure on profit margins. During this period of crisis the government went on to auction the 3G and Broadband Wireless Access (BWA) spectrum in April 2010. There were a total of 7 players excluding BSNL and MTNL who had participated in 3G auction which collected a whopping Rs.67000 Cr. which was far beyond expectation. The BWA auction grossed a total of around Rs. 38,000 Cr. with Infotel acquiring a pan India license. Current Trends The advent of low cost smart phones and cleansing of the Telecom ministry ensures promising results. Advent of 3G services marks a transition from voice communication to data communication and provides a new stream of revenue. Even though the companies had to carry a lot of debt to get a chunk of the spectrum, the future promises a stable and steady growth in this sector. All the major players have already rolled out their 3G services and are expecting a positive response as it happened in many of the other emerging economies. BSNL and MTNL were the first service providers who launched 3G services in December 2008. Among private players, Docomo launched its services in late 2010 followed by other major players like Bharti, Vodafone and Reliance. As of now the total number of 3G subscribers has crossed the 9 mn mark. The country has witnessed remarkable growth in the telecom sector and the figures are nothing but encouraging. With a CAGR of over 39% in mobile subscription base, the teledenities are soon approaching levels of saturation. Apart from that the DTH services and broadband segment has also witnessed tremendous potential for growth. At this stage we analyze where the sector is heading to and how companies go about to boost their revenues and capitalize on the growth in this sector. Major Segments within the Sector The Telecom Regulatory Authority of India

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(TRAI) broadly divides the industry into the following categories based on the technology and infrastructure requirements. Industry Concentration/Growth

Wireless Communication The wireless telephony consists primarily of the mobile subscriber base which has seen an explosive growth of 39.4% over the past five years. From a subscriber’s base of 98.4 mn users in 2005, this sector now has 752 mn users as of Dec ’10. With a Y-O-Y growth of 43.25%, this sector forms the backbone and is the driver the Indian Telecom sector. The teledensity (number of connections for every 100 persons) has also seen robust growth over the years. From a little over 9% in 2005, now it is over 63% as shown in the graph below. The wireless services can be further divided based on the technology used into, Global service for Mobile (GSM) Communication and Code Division Multiple Access (CDMA). GSM services are hugely popular because of its ease of availability, extended features and compatibility with high end mobile devices. The ARPUs contributed by the GSM services declined from Rs.110 last quarter to Rs. 105 in Dec ‘10. The contribution of prepaid customers to the subscriber base has also grown as shown in Table 3 which is a primary reason for declining ARPUs. Following similar trends as GSM, the ARPUs for CDMA have also shown a 6.38% decline.

Wireline Communication The traditional telephony service has been witnessing a decline in subscription base over the years. The popularity of the mobile services is the main reason apart from infrastructure requirements. Wireline subscriber base was at 35.09 million and Wireline teledensity at 2.95 in Dec ‘10. Rural subscriber base has shown Y-o-Y decline of 10.73%, from 9.95 Million in Dec-09 to 8.88 Million in Dec-10. During the same period, urban subscription recorded decline rate of 3.34%.

Internet & Broadband Services With the rapid increase in economic growth, it is essential to provide high speed robust web services to enhance E-commerce and E-business. India has witnessed a surge in internet usage, especially in the Broadband category which primarily delivers speeds greater than 256 Kbps. The total internet subscription base has increased by 4.43% from 17.9 million to 18.69 million in Dec’10. The broadband subscription during the same period had increased its share from 57.6% to 58.8%. The preferred technology for broadband access is Digital Subscriber Line (DSL) which covers over 86% of the market. Apart from the conventional internet access meth-

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Cable TV, Direct to Home (DTH) and Radio Broadcasting services The Cable TV and broadcasting division is witnessing a dramatic shift in technology and usage base. With the advent of new services like High definition (HD) and broadcast technologies, this sector is expected to witness a revolutionary change. The total number of broadcasters in this space is 24. There are a total of 604 channels out of which 155 are pay channels. Tata Sky, Big TV, Sun Direct, Dish TV, Bharti Telemedia and Bharat Business Channel are the six existing players in the telemedia services. Meanwhile the number of private FM radio services has declined from 248 to 245 in Dec ’10. Major Players and Market Share The GSM subscribers were 641.73 million on Dec-10 as against 578.49 million at the end of the previous quarter, registering a growth of 10.93% with Bharti (152.50 million subscribers) leading the market. In total there are 14 players which is quite an unusual number for a developing country. The CDMA subscriber base increased to 110.46 million in Dec-10 from 109.22 million at the end of previous quarter, a net growth of over 1%. Reliance with 54.10 million subscribers continues to dominate. In terms of net additions during the quarter, Sistema added 1.8mn subscribers and Tata, 0.97 million, while rest of the service providers recorded decline in subscribers. The major players in wireline segment are BSNL and MTNL. Being government owned enterprises gave them a head start in setting up the infrastructure and gaining a wide customer base. The leading private players in this space are Bharti and Reliance. Future Outlook and Conclusion With the advent of 3G services the telecom companies can expect a new revenue stream which will improve the drastically decreasing ARPUs. Essentially, with this new technology we can see an increase in the access of data content through mobile devices. The total number of 3G users has crossed the 9 million mark in the first 4 months. According to forecasts by PWC, the number of 3G subscribers is expected to cross 107 million by 2015. The increase in domestic smartphone manufacturers (Micromax, Karbon, Maxx etc.) has facilitated the widespread use of these premium services. These have eaten up into the share of other leading handset manufacturers like Nokia, Sony Erics-

son and Samsung by providing innovative features at affordable price bands. The revenue stream from these data services will continue for years to come since the 4G would ensure better services at high data rates. In India, The 4G LTE (Long Term Evolution) is expected to roll out in 2013. With auction for 4G spectrum already accomplished, telecom operators are already gearing up to purchase and deploy equipment necessary for launching services. With one of the fastest growing subscriber base in mobile telephony, customer base is expected to cross 1.2 billion according to TRAI estimates. The tele-densities are also on the rise with estimates suggesting a CAGR of 14.5%. These figures are supported by the fact that the country is expected to add 136 million people into the workforce in the next ten years. The government’s aggressive plan for rural inclusion is another factor which will enhance growth in this sector.

Forecasts of Mobile telephony market in India As mentioned earlier, rise of data communication will increase the revenue from value added services. Currently non voice services contribute

to only 10% of the total revenue in the telecom sector which is significantly lower than the levels observed in developed countries (23%). More than 50% of the revenue comes from call charges which have been hit by aggressive tariff plans thereby witnessing a decrease in revenue. The huge lag in the revenue from Mobile Value Added Services (MVAS) is expected to be reduced with the use of 3G services and subsequently the 4G-LTE technology. MVAS revenue is expected to increase at a rate of 30.5% and cross the $480 million mark by 2015. The surge in these revenue is

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ods, mobile operators have reported 332.43 million users who can access similar services. There are a total of 164 Internet Service Providers (ISPs) out of which the top ten hold 95% of the market share. BSNL leads the charts with over 56% of market share. Other prominent private players are Bharti, Reliance and Tata.

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expected to come primarily from mobile TV, video calling and other entertainment applications. Utility MVAS is also a prospective area for revenue recognition in areas like M- commerce, M- governance, M-Health, M-Education etc. These services will particularly be useful in semi-urban and rural areas where penetration is at around 30%. This untapped segment might provide a huge market for MVAS services and there are players in these segments who have already made headstarts towards catering these needs. Together with innovative avenues for MVAS application and rising contribution to overall revenue, The ARPUs are expected to stabilise and telecom players can reap rich dividends in the years to come.

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The remaining segments like wireline, internet and broadcasting services in the Telecom sector are expected to continue with the same level of growth rates as witnessed in the earlier quarters. The sector is primarily driven by market forces and the tariffs are largely unregulated. Thus the revenue will primarily depend on the policies collectively adopted by the market players and will be subject to change according to the advent of new technology. What lies ahead in the telecom space is nothing but promising. The sector has been marred by several controversies and stringent regulatory policies. But the Government has proactively taken steps towards ensuring such instances do not hamper the growth of this sector. Thus we can expect better governance in this space which would ensure the improved compliance policies.

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Cover Story Sectoview

W I N N E RS Sector Report Competition Results The Sector Report Competition conducted across b-schools in India to mark the entry of Niveshak in its 4th year was a huge success. The competition saw more than 100 teams from premier b-schools sending in their entries. Amidst so many good reports, it was indeed a difficult task to choose the best reports. We thank everyone for their enthusiastic participation. The results of Sector Report Competition are as below:-

1st Prize - INR 5000/Sanjeev Kumar & Senthil Kumar Subramanian NITIE, Mumbai

2nd prize - INR 3000/Anshul Mehta & Pranshu Srivastav DMS, IIT Delhi

3rd Prize - INR 1000/- (each team) Rahul, Amandeep Singh & Ravisha Kumar IIFT Delhi &

Asmita M Karanje SIBM Pune

FinQ Winner Roy Paul Mathew SJMSOM, IIT Bombay

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A N N O U N C E M E N TS ALL ARE INVITED

Team Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1000/Instructions »» Please email your article with the file name and the subject as <Title of the Article>_<Institute Name>_<Author’s name/Group’s name> by 10 September 2011. »» Article must be sent in Microsoft Word Document (doc/docx), Font: Times New Roman, Font Size: 12, Line spacing: 1.5 »» Please ensure that the entire document has a wordcount between 1200 - 1500 »» The cover page of the article should only contain the Title of the Article, the Author’s Name and the Institute’s Name »» Mention your e-mail id/ blog if you want the readers to contact you for further discussion »» Also, certain entries which could not make the cut to the Niveshak will get figured on our Blog in the ‘Specials’ section

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