A REPORT

ON

CORPORATE FINANCIAL ANALYSIS

COMPANY GUIDE FACULTY GUIDE

MR.SANJIV BHUYAN DR.BHARATHI KAMATH
DEPUTY VICE PRESIDENT ICFAI B-SCHOOL
CORPORATE BANKING MUMBAI

SUBMITTED BY
SURABHI NARAD
06BS2966
 ACKNOWLEDGMENTS

No significant achievement can be solo performance especially when starting a project

from ground up; this is true with the project called “CORPORATE FINANCIAL
ANALYSIS” also.

Mr. Sanjiv Bhuyan, has been very supportive and involved in this project. It was his
support that helped the project to start in its earliest and most vulnerable stages. I would
like to extend my gratitude towards him as he took out time from his extremely busy
schedule, for guiding and helping me during this project.

I would like to thank Mr. Rajeev Bhide, who helped me with his valuable suggestions
irrespective of his health problem.

This project could not have taken its present shape without the proper direction shown by
Dr.Bharathi Kamath.

My sincere thanks to all at HDFC BANK, who directly and indirectly helped me to carry
forward this project.
 TABLE OF CONTENTS

Executive Summary.............................................................................1

Introduction..........................................................................................2

About the company..............................................................................3

Objective and flow of the project........................................................4

Analysis of Chemical industry............................................................5

Analysis of Power equipment industry..............................................37

Analysis of Auto ancillary industry...................................................62

Analysis of Textile industry..............................................................86

Analysis of Food processing industry.............................................114

Conclusion.......................................................................................140

Value additions from the project.....................................................141

References.......................................................................................142
 EXECUTIVE SUMMARY

This is a project which is being done for HDFC CORPORATE BANK. The aim of this
project is to identify those companies which can be potential clients for HDFC's business.
These companies belong to five industries (industries have been decided by Mr.Sanjiv
Bhuyan, the company guide) in India.

HDFC Bank's aim behind bringing this project on floor is that it wanted to have more
volume of business with less number of clients. It is more useful to do business with few
big clients rather than dealing with various small clients. Because the ultimate aim of any
business is increasing profit and reducing cost. With the above aim in mind HDFC Bank
will achieve both.

This project deals with following five industries:

 Chemical Industry
 Power Equipment Industry
 Auto Ancillary Industry
 Textile industry
 Food Processing Industry

The first step is to do analysis of the industry. By analysis of the industry one gets a good
and in depth understanding of that particular industry. For e.g. It helps in analyzing
whether the industry requires large investment or has large working capital requirement.
Industry analysis clearly shows investment opportunities present in the industry and the
risks associated with it.

This is useful in analyzing global scenario of the industry and its impact on the Indian
industry. This also helps in identifying the major competitors present in the market and to
study their strategies and moves. All this is similar to equip yourself properly before you
enter the battle field so that the chances of victory increases.

Then, the second step is to find databases containing all companies present in Indian in
that particular industry .

Third step is to sort out companies in western India with a turnover of more than Rs. 300
crores. And then financial analysis of each firm is done.

In fourth and the last step is to understand all the products provided by HDFC Corporate
Bank. Then decide which product will be best suited to which firm in above mentioned
industries.

1
 INTRODUCTION
BANK: STRUCTURE AND FUNCTIONS

A bank is a business which provides financial services for profit. Traditional banking
services include receiving deposits of money, lending money and processing transactions.
Traditionally, a bank generates profits from transaction fees on financial services and
from the interest it charges for lending. Much of a bank's income is provided by overdraft
fees and riskier investments.

Banks' activities can be divided into retail banking, dealing directly with individuals and
small businesses, and investment banking, relating to activities on the financial markets.

Banks have a long history, and have influenced economies and politics for centuries.

A bank raises funds by attracting deposits, borrowing money in the inter-bank market, or
issuing financial instruments in the money market or a capital market. The bank then
lends out most of these funds to borrowers. However, it would not be prudent for a bank
to lend out all of its balance sheet. It must keep a certain proportion of its funds in reserve
so that it can repay depositors who withdraw their deposits. Bank reserves are typically
kept in the form of a deposit with a central bank. This behavior is called fractional-
reserve banking and it is a central issue of monetary policy.

Banks are susceptible to risks which include liquidity risk (the risk that many depositors
will request withdrawals beyond available funds), credit risk (the risk that those that owe
money to the bank will not repay), and interest rate risk (the risk that the bank will
become unprofitable.

Banks, especially commercial banks play a crucial role in accelerating the tempo of
growth in a developing economy. Therefore, there must be a central governing body
which may run the system smoothly and economy of the country keeps on rolling. Such a
body is known as CENTRAL BANK of the country.

A central bank or reserve bank is an entity responsible for the monetary policy of its
country. It has supervisory powers to ensure that banks and other financial institutions do
not behave recklessly or fraudulently. A central bank is usually state-owned and headed
by a Governor.

“THE RESERVE BANK OF INDIA” is the central bank of the country entrusted with
monetary stability, the management of currency and the supervision of the financial as
well as the payments system.

The Bank was constituted to

 Regulate the issue of banknotes.
 Maintain reserves with a view to securing monetary stability
 To operate the credit and currency system of the country to its advantage.
2
 ABOUT THE COMPANY

HDFC Bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with
its registered office in Mumbai, India. The Bank commenced operations as a Scheduled
Commercial Bank in January 1995.

Headquartered in Mumbai, HDFC Bank, has a network of around 650 branches spread
over 270 cities across India. All branches are linked on an on line real-time basis.
Customers in over 120 locations are serviced through Telephone Banking. The Bank also
has a network of about over 1050 networked ATMs across these cities.

HDFC offers various services, some of them are Branch Banking, Retail Assets, Product
Development, Operations, Marketing, Treasury, Equities, Corporate Banking, Cash
Management Services, Custody and Depositories etc.

HDFC IN CORPORATE BANKING

Corporate Banking is a part of wholesale banking. Corporate Banking reflects HDFC

Bank's services to their corporate clients in India, a wide array of commercial,
transactional and electronic banking products. They achieve this through innovative
product development and a well-integrated approach to relationship management. HDFC
offers top companies in the India, a full range of client-focused corporate banking
services, including working capital finance, trade and transactional services, foreign
exchange and cash management, to name a few. The product offerings are suitably
structured taking into account a client's risk profile and specific needs. Based on their
superior product delivery, industry benchmark service levels and strong customer
orientation, they have made significant inroads into the formal banking consortia of a
number of Indian companies including multinationals, domestic business houses and
prime public sector companies.

3
 OBJECTIVE AND FLOW OF THE PROJECT

Basically the project is all about to identify those companies, in five industries, which
can be potential clients for HDFC's business.

In this project, I have to deal with following five industries, namely:

 Chemical Industry
 Power Equipment Industry
 Auto Ancillary Industry
 Textile industry
 Food Processing Industry

The flow of the project will be the same as explained in following few paragraphs.
The first and the foremost step is to do analysis of the industry. Through this analysis
following things become clear about the particular industry:

 Characteristics of the industry.

 Growth drivers of the industry.
 Risk factors involved in the industry.
 Major players in the industry.
 Whether the industry requires large investment or has large working capital
requirement.
 Investment opportunities present in the industry.

Through industry analysis one can understand

 Requirements of the industry.
 Dynamics of the industry.
 Major competitors present in the market and their strategies.

After this search of databases begins, here aim is to find as many companies present in
the industry as possible. Then financial analysis of each firm is done. Firstly, from the
balance sheet of the company, its turnover is checked. If turnover is less than Rs. 300 Crs,
that company is removed from the list. Secondly, profitability and Net worth of the
company is calculated.

After this, study of all the products provided by HDFC Corporate Bank will be done
thoroughly so that those products can be sorted out which fit into that particular industry
and accordingly marketed to the potential clients.

The study of all the five industries will follow the same flow as explained above.

4
 ANALYSIS

OF THE

CHEMICAL INDUSTRY

INDIAN CHEMICAL INDUSTRY

India is one of the fastest growing economies in the world, making rapid progress since
1991. The country has undertaken far-reaching economic reforms of deregulation and
liberalization as well as financial and corporate restructuring, which have enhanced
economic growth rates considerably.

Chemical industry is one of the oldest industries in India. It not only plays a crucial role
in meeting the daily needs of the common man, but also contributes significantly towards
industrial and economic growth of the nation. The industry, including petro-chemicals,
and alcohol-based chemicals, has grown at a pace outperforming the overall growth of
the industry.

The global chemical market is estimated at approximately USD 1.7 trillion. Western
Europe is the largest chemical-producing region followed by North America and Asia.

The Indian chemicals and materials industry is the second largest industrial sector in the
country,behind information technology (IT). The chemicals, materials, and foods (CMF)
industry is one of the oldest in India, contributing significantly to its industrial and
economic growth. India ranks 12th in the world and third in Asia in the production of
chemicals and materials and is poised to become a major venue for out souring chemical
manufacturing.

The current economy and the general economic policies have stimulated various
segments of the Indian CMF industry and its industry-specific policies have facilitated its
development. The Indian CMF industry is mainly demand-driven and increasing foreign
and industrial investments drive the industry further. Trends in investment, exports, and
imports have also greatly influenced the CMF industry.

Chemicals, Materials, and Foods Country Industry Forecast service provides vital inputs
for evaluating the attractiveness of a country and its CMF industry. Besides enabling
decision makers to assess the impact of non-market forces, it also helps in identifying
new market opportunities. This service provides a strong base for preparing contingency
plans. In addition, investors can assess industry-specific risk factors as well as conduct a
more in-depth micro research.

The Indian Chemicals Industry comprises both small and large scale units. The fiscal
concessions granted to small sector in mid-eighties led to establishment of large number
of units in the Small Scale Industry (SSI) sector. Currently, the Indian Chemical Industry
is in the midst of major restructuring and consolidation phase. With the shift in emphasis
on product innovation, brand building and environmental friendliness, this industry is
increasingly moving towards greater customer-orientation. Even though India enjoys an
abundant supply of basic raw materials, it will have to build upon technical services and
marketing capabilities to face global competition and increase its share of exports.

The Indian Chemical Industry ranks 12th by volume in the world production of
chemicals. The industry’s current turnover is about USD 30.8 billion which is 14% of the
total manufacturing output of the country. The export of chemicals in the year 2002 was
USD 5.875 billion, which forms almost 0.9 % of the world export of chemical products
and about 13% of the country’s total export. Substantial proportion of these exports goes
to the USA, Europe and other developed nations. Its contribution to the national revenue
by way of custom and excise duties is about 20%. India is strong in basic chemicals that
go into production of consumer items like paints, dyes, soaps, medicines, toiletries,
cosmetics, etc.

The chemical, petrochemical and pharmaceutical industry in India is one of the fastest
growing segments of the industrial sector with an annual growth rate of 12.5% per year
for the last 10 years. It accounts for 12.5% of India's industrial production and 16.2% of
the country's exports of manufactured goods. This rate of growth has been consistently
high as the country has one of the largest resources of scientific and technical manpower
in the world with the capacity to absorb, upgrade and develop high technology. India also
has excellent engineering and project management skills.

CHEMICAL INDUSTRY STRUCTURE IN INDIA

Source: KPMG Survey of the Indian chemical industry, 2002

 Highly fragmented and widely dispersed. Wide product range – basic, speciality
and knowledge segments. Basic comprising of petrochemicals, inorganic
chemicals and fertilizers is the largest segment.
 Output 2% of the world total output --- USD 30 billion.
 Petrochemicals --- usd 7 billion (22% of India's total chemical output).
 Industry growth rate is approx. 5% during the last 5 years.
 Profit margin- 14%.
 Western India accounts for 45-50% of total Indian chemical Industry.
 Gujarat, Maharastra , West Bengal and Andhra Pradesh has the largest
concentration of chemical and petro chemical industries.
 Large players in bulk chemicals. Both large and small players in Fine and
Speciality chemicals.
 Presence of many multinational companies also.

Factors Responsible for Limiting the Growth of Chemical Industry

 Indian manufacturers compare favourably in terms of key manufacturing
conversion costs with the best in the world.
 High Power Cost (Utility costs are higher)
 Inefficient Process Technology
 Basic Feed Stock Prices are High
 Cascading Effects of various Taxes and Duties
  Stringent labour Laws
 Uneconomic Size of plants (due to erstwhile licensing system)
 High Cost of Finance (Interest rates are high)
 Inadequate infrastructure Facility (Road, Rail and Ports)
 International Competition (Dumping)
 Drastic Reduction in Import Duties (unable to compete in global scenario)
Source – CMIE

Above weaknesses are the reason of the declining profitability of the Indian chemical
industry. Following statistic substantiates the above made statement.
DEMAND AND SUPPLY
In terms of consumption, the chemical industry is its own largest customer and accounts
for approximately 33 per cent of the consumption. In most cases, basic chemicals
undergo several processing stages to be converted into downstream chemicals. These in
turn are used for industrial applications, agriculture, or directly for consumer markets.
Industrial and agricultural uses of chemicals include auxiliary materials such as
adhesives, unprocessed plastics, dyes and fertilizers, while uses within the consumer
sector include pharmaceuticals, cosmetics, household products, paints, etc.

INDIAN DEMAND AND SUPPLY SCENARIO

The Indian chemical industry manufacturers a wide spectrum of products spanning the
Basic, Speciality and Knowledge segments.

At 57 percent , Basic chemicals comprise the largest segment of the Indian chemical
industry. The composition of the industry, however , is shifting in favour of Speciality
and Knowledge chemicals.
GLOBAL CHEMICAL MARKET AND THE CURRENT TREND

Source: KPMG survey of the Indian chemical industry, 2002

GLOBAL CHEMICAL INDUSTRY

Globally, the Basic segment accounts for about 52 percent of the industry, Speciality 20
percent and Knowledge 28 percent.
 Source: Department of chemicals & petrochemicals, GOI

Knowledge is the fastest growing segment – growing at more than six times the growth
rate of Basic. Speciality has a growth rate faster than Basic, but lags behind the
Knowledge segment as shown in the following figure.
Cost structure of the three segments highlight distinct characteristics. Basic has high
feedstock and other raw material costs, whereas speciality has very high selling and
product development costs. Knowledge segment, on the other hand is characterised by
large spends on advertising and R&D. Basic is the most mature segment with the lowest
profitability , while knowledge chemicals have the highest profitability and growth
projections.
Following graph shows the growth rate of Indian chemical industry with respect to global
industry in high potential segment.
SEGMENTAL ANALYSIS
Highly heterogeneous, the chemical industry in India encompasses many sectors like
organic, inorganic chemicals, dyestuffs, paints, pesticides, specialty chemicals, etc. Some
of its more prominent individual chemical industries are caustic soda, soda ash, carbon
black, phenol, acetic acid, methanol and azo dyes. Broadly, the chemical industry in India
is classified into polymerization products, basic chemicals, fine chemicals and
pharmaceuticals. It accounts for more than 10% of the country's total export earnings.

India also produces a large number of fine and speciality chemicals, which have very
specific uses and are essential for increasing industrial production. These find wide usage
as food additives, pigments, polymer additives, anti-oxidants in the rubber industry, etc.
Some of the important manufacturers of speciality chemicals include NOCIL, Bayer
(India), ICI (India), Hico Products and Colourchem.

The Dyestuff sector is one of the important segments of the chemicals industry in India,
having forward and backward linkages with a variety of sectors like textiles, leather,
paper, plastics, printing ink and foodstuffs.India has emerged as a global supplier of
dyestuff and dyes intermediates, particularly for reactive, acid, vat and direct dyes. As for
a global production of dyes is concerned, India accounts for 6% of the world production.

Chemical fertilizers and pesticides played an important role in the "Green Revolution"
during the 1960s and 1970s. The consumption of pesticides in India is low in comparison
to other countries. Indian exports of agrochemicals have shown an impressive growth
over the last five years.

The key export destination markets are USA, UK, France, Netherlands, Belgium, Spain,
South Africa, Bangladesh, Malaysia and Singapore.

Chemical industry is broadly segmented into :

u Petrochemicals
u Inorganic Chemicals
u Organic Chemicals
u Fine and specialties
u Bulk Drugs
u Agrochemicals
u Paints and Dyes
 Source:Department of chemicals & petrochemicals, GOI

INDIAN PETROCHEMICALS
✔ Domestic market size – US$700 million
✔ Fastest growing sector at 15%
✔ Reliance – key player in this market

INORGANIC CHEMICALS
✔ Market size – US$260 million
✔ Growth rate – 9%
✔ 4.5% of global market
✔ Mainly used in detergent, glass, soap, fertilizer and alkalis

PHARMACEUTICALS
✔ India ranks 4th In terms of volume & 13th in terms of value.
✔ Domestic market size – US$450 million
✔ Indian market is 1.6% of the global market
✔ Domestic market growth rate – 8 to 9%
✔ Strong player in generic market--several of the world’s leading drug
companies are based in India.
✔ Significant export led growth

AGRO CHEMICALS AND FERTILISERS

✔ Domestic market size – US$88 million
 ✔ Domestic market growth rate – 10% annually
✔ 2.5% of the global market.
✔ In India, insecticide commands major share 76%.
✔ Globally, herbicides commands major share 48% & insecticide only 29%.
✔ India is largest manufacture of basic pesticide chemicals among South Asia
& Africa, next only to Japan.

SPECIALITY & FINE CHEMICALS

✔ Market size – US$860 million
✔ Major used in textile, leather, paper, detergent, rubber,
✔ Paints, polyester, oil & gas.
✔ Growth rate – 10-12%.

DYES & PAINTS

✔ Market size – US$110 million.
✔ Growth rate – 12%
✔ Indian market is 6% of the global market
✔ Major used in
✔ Paints, inks, textiles, polymers.
✔ Highly fragmented market
✔ 25 large & medium players holding 50% of the market.
✔ Remaining 50% is with another small 2000 un-organized players

Success Stories in Fine & Specialty Chemicals

In the pharmaceutical industry, India has demonstrated repeatedly its ability to produce
the latest drugs available in the world cost effectively. Within six months after Pfizer
launched ‘Viagra’ globally, 3 -4 Indian pharmaceutical companies had introduced it to
India market. Demonstrated ability to develop and absorb the latest technologies.
Examples are given below :

Rallis manufactures Hexaconazole, a complex Agro-Chemical with purity of 95% with

indigenous technology. The innovator produces this product with 90% purity.
Gharda manufactures Dicamba, another complex Agro Chemical with purity of 95% with
indigenous technology. The innovator of this product produces this product with a purity
of 87%.

Other examples include the anti-AIDS drugs including ‘Lamivudine’ ‘Zidovudine’ and
‘Indinavir’ each of which are being produced in India at a cost which is a fraction of the
price at which these products are being sold internationally.

The following diagram, very well expresses the industry opinion regarding future of
various segments in chemical industries:-
(MCIE stands for Mega Chemical Complexes)

Source: Department of chemicals & petrochemicals, GOI

INDUSTRY DYNAMICS
The Government is promoting research on the use of alternative and unharmful pesticides
using neem seeds. A country programme entitled "Development and Production of Neem
Products as Environment Friendly Pesticides" is being undertaken by the Department of
Chemicals & Petrochemicals with the financial assistance of United Nations
Development Programme (UNDP)/ United Nations Industrial Development Organization
(UNIDO). The project is being implemented at two locations viz., Nimpith in West
Bengal and Nagpur in Maharashtra to promote production, processing and use of neem-
based products, thereby aiding wasteland development, generating rural employment and
providing farmers with eco-friendly/ bio-degradable pesticides.

MAJOR COSTS INVOLVED IN CHEMICAL MANUFACTURING

 Raw materials
 R& D
 Processing
 Preservation
 Special containers for storage

INDIAN GENERIC INDUSTRY

India has a significant share in the global generics market and is ranked third. In recent
years, this segment has been facing stiff competition which makes the scale of production
important to improve profitability. India has pre-dominantly been a generic player and
has the potential to gain a global presence for the following key developments:

 Multiple branded drug patent expirations in the short term. According to IMS
Health, in 2006 and 2007 a total of US$ 28 bn and US$ 20 bn, respectively, of
branded sales were likely to become susceptible to the entry of generic
equivalents.
 Increasing confidence of consumers in generics in the developed markets.
 A pro-generic sentiment from healthcare authorities driven by the pressure of
containing rising healthcare costs.
 An aging population across the world, leading to increasing demand for low cost
therapies.
 Global healthcare crisis like AIDS in the developing world, necessitating
affordable medication for the masses.

Generic companies in India are recognizing the importance of patent expiries and are
making significant incremental investments in research and drug development

INDIAN BIOTECH INDUSTRY

India, today, holds a small share of the global biotech market, but has all the capabilities
to become a dominant player. The consumption of biotech products in India is expected
to quadruple in the next decade. The human and animal segment of the industry alone is
growing by at least 20%.

While India has been practicing conventional biotechnology for decades modern
biotechnology is rather new to India. In 1997, the total biotech market in India was
valued at $ 500 million. This grew to $ 1 billion in 1999 and is expected to grow to $ 4.5
billion by 2010. Human health biotech accounts for 60 % of the total sales, while agro
biotech and veterinary-biotech together account for 15 % of the total revenue and medical
devices, contract R&D and reagents and supplies constitute the remainder. There exist
800 companies, operating in all sectors of biotechnology, but there are only 25 companies
that are working in the modern biotech sectors.

India has very interesting natural features like bio-diversity, varied species of flora and
fauna, varied climatic zones, large population with varied demography, largest agriculture
sectors, world-class information-technology industry, vibrant pharmaceutical sector and a
large pool of scientific talent that creates almost a perfect environment for biotech
companies to shift base here. With its large population of over a billion people India also
provides a huge market for products and services.

India has a rich human capital, which is the strongest asset for this knowledge-based
industry. India has a large English speaking base and produces roughly 2.5 million
graduates in IT, engineering and life sciences, about 650,000 postgraduates and nearly
1500 PhDs qualified in biosciences and engineering each year. India has proved its
competency in selected areas of biotechnology such as capacity in bioprocess
engineering, skills in gene manipulation of microbes and animal cells, capacity in
downstream processing and isolation methods, and its competence in recombinant DNA
technology of plants and animals.

India has also allowed assisted stem cell research that permits researchers to use embryos
from fertility clinics upon informed consent of the donors, thus giving it a clear head start
in this new and promising field in Biotech. Clearly, India has the strength and capabilities
in this industry, and a definite advantage to forge ahead and become the chosen location
for many biotech companies looking for large markets and low cost qualified manpower
to work in their R&D division.

The inherent strengths of the Nation combined with rising public interest in this sector,
growing investment by traditional business houses, tax incentives and the significant
foreign investment available, poises Indian biotechnology sector to emerge as a
significant force on the global biotech map.

GROWTH DRIVERS FOR INDIAN CHEMICAL INDUSTRY

  Consolidation
 Growing orientation towards Research and Development (R&D)
 Outsourcing
 Growing Demand
 Pharma sector going strong
 Environmental consciousness

Consolidation

Industry Segment Key Drivers

Basic Segment Falling duties; scale in manufacturing,

logistics, marketing and finance.
Speciality Segment Proprietary knowledge, research initiatives,
accessibility of funds for R&D.

Knowledge Segment Product registrations, research initiatives,

joint funds for combined R&D.

Growing orientation towards Research and Development (R&D)

The Indian chemical market is shifting from commodity selling industry to skilled
industry producing speciality products. Following figures reveal the fact: In India,
presently there are approximately,
 200 National laboratories.
 1300 R&D units.
 244 universities.
 200,000 scientific personnel

Following are the factors which act as driver in R&D:

 Efficiencies in manufacturing to reduce costs, scale in processes at each stage.
 Investment in bio-technology by pharma and agro-chemical sectors to derive
“first advantage”.
 New products or applications.

The introduction of product patent has led the domestic industry towards exploring new
avenues of drug development, which would require higher capital investment in R&D,
and greater thrust towards innovation. Current trends indicate that R&D expenditure of
top domestic companies has increased from a mere 2% of total turnover in CY00 to
nearly 4% in CY05.

Outsourcing
India's workforce ranks first in the availability of qualified, skilled engineers. This leads
to many advantages like lower capital outlay , focus on core activities , reduce risk ,
generate faster cycle times.

Growing Demand
In Indian industry , following are the growth rates for different segment:
 Speciality chemical industry = 8%
 Paints = 8 – 10 %
 Pharmaceuticals = 9%
 Knowledge chemicals = 12%

Pharma sector going strong

 Globally , the output of Indian pharmaceutical industry ranks fourth in terms of
volume and 13th in terms of value.
 In FY02, the domestic Indian pharma market was valued at $4.5bn , representing
1.6% of the global market, and is growing at an annual rate of 9%.
 The industry produces about 60,000 finished medicines and roughly 400 bulk
drugs, which are used in formulations.
 In FY03, the Indian pharma market is estimated to have exported drug worth Rs.
110bn.
 In the past eight years, the pharma exports grew by 30% per annum.

Following are the growth drivers for the pharma industry;

 High number of manufacturing units approved by USFDA.
 Manufacturing costs less than 1/10th of developed nations.
 Well established API manufacturing industry.
 High level of IT awareness of R&D staff.
 Expertise in process development.

Environmental consciousness
 Government initiative in consultation with the industry
 Formalization of charter on Corporate Responsibility for Environmental
Protection (CREP) for 17 categories of industry.

Leveraging CRAMs opportunities

India is emerging as the global hub for contract research and manufacturing services
(CRAMs) due to its low cost advantage and world class quality standards. The Indian
chemical industry possesses world standard manufacturing facilities as per the GMP
norms which are approved by various regulatory agencies across the globe.

Majority of the contract manufacturing deals relate to production of active

pharmaceutical ingredients (APIs) and intermediates, in which India possesses
competence. Nicholas Piramal, Shasun Chemicals, Divi’s Lab, Dishman Pharma, Cadila
Healthcare, Lupin, Matrix Lab and Aurobindo Pharma are some of the companies which
have witnessed impressive growth in revenues from their CRAMs business under various
tie-ups with global pharmaceutical majors.

Growing exports
The proportion of exports in domestic turnover has been increasing over the years,
despite the growing domestic demand. Exports have been the major growth enabler of the
Indian chemical industry in recent years. India exports chemical products, APIs and
intermediates to more than 200 countries across the world.

Expanding presence in regulated market

Over the years, India has shown better regulatory awareness and superior technical skills,
which has enabled Indian companies to penetrate the high-value markets like the US and
EU. For instance, exports of pharmaceutical products (finished products as classified
under heading 30 of ITC-HS code) to the US grew by an impressive 33% to Rs 23 bn and
by a whopping 62% to Rs 35 bn to the EU during FY04-FY06. Regulated markets,
though difficult to penetrate due to stringent regulations, are known to give better value
and margin to exporters. The increasing presence in high-value markets like the USA and
Europe has strongly boosted the overall growth of the Indian chemical industry. However,
with competition getting stiffer in the regulated markets and the consequent pressure on
margins, Indian players are also expanding their geographical reach to high-growth
regions

Rise in new product launches

In the pharmaceutical industry, new product launches create new demand. After the
introduction of product patent in India, the domestic industry has witnessed a fresh spell
of new product launches. New products launched since 2005 accounted for around 12%
of the overall market growth. These launches have been done by both domestic and
international players and some of them are first time launch of new chemical entity
(NCE).
ENTRY BARRIERS
This well-diversified sector covers more than 70,000 commercial products and is
intensive in knowledge, capital and power. This sector has made good progress during the
last five years, and turned from a net importer in the 1990s to a net exporter. During
2005-06, however, there was a deceleration in the growth rate of the sector
to 8.2 per cent from 14.5 per cent in 2004-05.
Major part of Indian exports of chemicals goes to highly developed western countries,
where the quality standards are very strict. And therefore following are the industry
specific barriers for a new entrant:

 Heavy investment in Research and development.

 Expensive infrastructure
 Quality assurance norms have to be strictly adhered to.
RISK AND CONSTRAINTS
 Cost of power: Very high cost and poor quality of power.
 Cost of Finance: Chemical industry is highly capital-intensive, cost of finance in
India is very high.
 Infrastructure: Infrastructure facilities are not of world class.

Weakness: Legacy of Past policies of Industrialization

 Technology: Low Investment in R&D to be able to sell value added products and
compete in developed countries is absent.
 Cost Disadvantages : Locational disadvantages, such as extra transport cost for
raw materials as well as finished products.
 Scale of Production : Plant sizes are not comparable to world scale operations.
 Multiplicity of Taxes: Multiple levies (various taxes and duties likes sales tax,
turnover tax, Octroi, service tax, electricity duty and cross subsidies etc)..

Threats:
 Quantitative Restrictions for imports have been removed already. Most of the
chemicals are now in the Open General List(OGL) of import.
 Tariff levels in India for most chemicals are significantly higher than in other
countries manufacturing the chemicals.
 Pressure on the government to reduce these tariff levels.
 Unless industry acquires competitiveness, it may face extinction.

Price erosion in generics

Indian generics market is witnessing a margin pressure in most of the product categories
due to two main reasons: the proposed price control likely to be imposed by the
Government and the stiff competition among domestic players. In fact, India has
witnessed a fast rise in the number of players over a period of time. Moreover, the
expansion of capacities by certain leading players has also fuelled competition in certain
product categories, which restricts margins of the smaller players.

The fall in prices of generic drugs are not limited to India only. The US, which is the
world’s largest pharmaceutical market, is also experiencing a sharp reduction in prices of
generic drugs due to stiff competition. Some other developed countries like the UK and
Germany have also witnessed the same scenario. The erosion in prices is to the extent of
90% in some cases. Indian players, which have been operating in these markets, have
also witnessed erosion in margins in certain therapeutic segments.

Low R&D productivity

Despite the increasing expenditure on R&D, the introduction of new molecules by Indian
players has been limited. It is, in fact, a hit-and-miss situation in the field of discovery
and developments of new chemical entity (NCEs), where misses are more than hits. Very
few discoveries reach the final stages of approvals, and in most of the cases, the claim for
patent gets stuck in legal battles.
In spite of the rising expenditure in R&D, the level of investment in R&D is still low, at
average 4% as compared to the global practice of spending 12-16% of sales on R&D.
The European generics market has emerged as a major attraction for acquisitions by
Indian companies. According to reports, margin erosion in Europe is much less compared
to the US when a drug or formulation becomes generic.
INVESTMENT REQUIREMENTS
Chemical and Petrochemical Industry occupies an important place in the country’s
economy, as the Chemical industry has grown at a pace outperforming the overall growth
of the industry. The Chemical Industry produces a wide spectrum of products, which
include Pharmaceuticals, Dyes, Man-made Fibers, Plastics, Pesticides, Fertilizers,
Cosmetics and Toiletries, Paint, Auxiliary Chemicals and wide range of Organic and
Inorganic compounds for applications ranging from automobiles, textile industry,
engineering industry, construction chemicals and food additives to veterinary and health
care products.

The lower per capita consumption of many important items at present and growing
middle class with increasing purchase power constitutes an attractive market for various
products The development of Chemical and Petrochemical Industry requires creation of
basic and allied infrastructure facilities and in view of the availability of the same, the
Indian/Gujarat Chemical Industry has opportunity to grow within as well as outside the
country. Further the motivated entrepreneurs, pool of technical manpower and flexibility
to changes in production set up which forms the competitive strength of the Chemical
Industry in the State and therefore, will rise to all opportunities for development and
growth in the investment.

The Chemical Industry needs to engage in strategic partnerships with foreign partners
with a view to realize and capitalize the latent potential. The existing technology needs to
be upgraded with the help of foreign partners. The Chemical Industry in India/Gujarat
provides a large scope for collaboration in Technology tie-up, Process Development,
Joint Research and Development, Solid and Liquid Waste Management and Market
Access for various sub-sectors of the industry.
GOVERNMENT POLICIES
Government policies play an important role in shaping the future of any business.
Decision makers at both macros as well micro level will have to take into account
existing policies, the way Govt. and other bodies are thinking about them and what will
be the shape of these policies in future to come.

Industrial Policy:
The items, which require compulsory license are Hydrocyanic acid and its derivatives;
Phosgene and its derivatives; Naptha/Gas cracker complexes producing and its ethylene,
propylene, aromatic complexes manufacturing benzene, toluene & xylenses- o-xylene,
ethylene oxide and polyethylene having a specific gravity of less than 0.94

Policy for foreign direct investments facilities approval through automatic route. The
following categories of FDI proposal are only approved through foreign investment
promotion board. All proposal that require industrial licence includes, the items requiring
an industrial licence under the IDR Act, 1951; all items which require industrial licence
in terms of locational policy notified by government under the new industrial policy. All
proposals relating to acquisition of shares in existing Indian company in favour of a
foreign/NRI/OCB investor. All proposals failing outside sectoral policy/caps or under
sectors in which FDI is not permitted and/or whenever any investor chooses to make an
application to the FIPB an not to avail of the automatic route
KEY PLAYERS IN INDIAN INDUSTRY
Indian Chemical Council, ICC is the apex national body representing all the sectors of the
chemical industry in India viz. Organic and Inorganic, Plastics and Petrochemicals, Dyes
and Dye-intermediates, Drugs and Pharmaceuticals, Agrochemicals and Pesticides, Fine
Chemicals, Specialty Chemicals etc. ICC has its members spread all over India. Since the
concentration of the chemical industry is mainly in Maharashtra and Gujarat, the western
region consists about 60 % of the total membership of ICC.

Few well known and major Indian players of this industry are Ranbaxy in
pharmaceuticals, Asian paints, Pidilite in paints and dye segment.
FUTURE OUTLOOK
The Indian chemical industry is passing through a transformation and industry players are
organizing themselves to avail of the immense opportunities that have opened up
globally. The sector is set to report impressive growth in the years to come and outlook
for the industry remains strong.

Following are the factors which substantiate the strong outlook for the industry:

Demographic factors
Population growth coupled with rise in per capita income and increasing usage are factors
which will continue to drive domestic demand for the chemical industry. According to
projections given in the Economic Survey 2005-06, India’s population is likely to touch
14.11 bn by 2026.

New product launches

After the introduction of product patent laws in India, multinational companies have
shown renewed interest in launching some blockbuster products in India. This trend is
likely to continue in future as well. Launches of new molecules by MNCs will accrue
contract manufacturing and in-licensing opportunities for Indian players including the
small and medium enterprises. SMEs have acquired expertise in formulations & chemical
synthesis. Manufacturing under contracts gives them a safe position against margin
fluctuations.

Increasing investments in R&D in pharmaceutical industry

Given the long gestation period right from the discovery of molecules to the final
approval for marketing, the current investments made towards R&D will lead to
sustainable growth. Some important molecules developed by Indian players have already
reached different stages of clinical trials, some of which have reached the critical phase-
II.

Growing generics market - an opportunity for India

Increasing number of products getting off-patent and recognition of generic drugs by
some developed countries is set to expand opportunities for India in the generics market.
The generic industry is estimated to grow by more than 20% annually till 2008 and the
total size is estimated to be around US$ 80 bn by 2008. In the US, generic drugs make up
for 55% of the prescription written.

Leveraging the cost-effective production capabilities of Indian manufacturers, better

scientific skills and favourable regulatory environment, the Indian pharmaceutical
industry is well-placed to tap these opportunities.

Growing exports market

Exports will continue to remain strong and an enabler of growth for the chemical
industry. Impressive performance of Indian exports, achieved during last few years, is
likely to continue in the near future. Despite the growing competition in the global
generics market and increased participation among developing countries in the global
chemical market, Indian companies have already proven their ability to compete.
CRAMs opportunities will continue to pick up
Contract manufacturing and contract research will gain prominence among the Indian
pharmaceutical companies. There has been a spate of tie-ups and acquisitions by
companies in the CRAMS segment in India. The driving factors include the rising
manufacturing costs in developed countries and falling prices in the generics segment
world over. India aptly suits the changing global scenario, having the largest number of
US FDA approved facilities outside the US and low cost manpower with technical
expertise. Contract manufacturing business is estimated to touch US $30 bn by 2010 and
is likely to grow at 10-12%.

In the field of R&D, Indian companies are capable of conducting various clinical trials at
relatively lower costs. Although India has also started experiencing rising bills on skilled
manpower, it is still in a relatively advantageous position on the cost front. Contract
research business is estimated at US$ 6-10 bn, and is growing in the range of 16-18%.

Competitive Advantage of India

 Large resource of scientific and technical manpower
 Large domestic market for various sectors of chemicals.
 Long coast line and abundant availability of salt.
 Tropical region: facilitating open storage for bulk chemicals.
 A developed financial market.
 A large English-speaking population
 Rapid growth in Information Technology provides competitive access to the rich
European and American market.

Vision for the Future

 Developing a global outlook
 World scale capacities
 Mutually beneficial strategic alliances
 Responsible care
Following diagram shows Indian chemical industry and how can it increase
its hold in global market
RECOMMENDATIONS
For most of the leading companies in speciality segment and pharmaceutical sement, the
future is indeed promising. Biotech, is also an upcoming sector and its market will shoot
high with coming period.

The establishment of business relations with these companies will definately prove
fruitful to HDFC Bank and will open new avenues for its growth and success.
LIST OF COMPANIES
We have to concentrate on firms operating in western region of India and have turnover
more than 300 crores.

Following companies are sorted from large databases on the basis of following
parameter: turnover, networth and profitability. After doing a detailed study of all the
firms, following firms are found to satisfy the above mentioned criteria.

COMPANY NAME TURNOVER (IN INR CRORES)

Aarti Industries Limited 856
Alembic Limited 666
Asian Paints India Limited 2679
BASF India Limited 18672
Bilag Industries Private Limited 987
Borax Morarji Limited 317
Cabot India Limited 11520
CIBA Speciality Chemicals India Limited 22987
Clariant India Limited 459
Cognis Ahura Private Limited 18446
Colourtex Industries Private Limited 453
Glaxosmithkline Pharmaceuticals Limited 1710
Goodlass Nerolac Paints Limited 1226
Gujrat Alkalies & Chemicals Limited 1046
Gujrat Narmada Valley Fertilizers Company limited 2281
Gujrat Organics Limited 2039
Gujrat State Fertilizers & Chemicals Limited 2940
Hindalco Industries Limited 11397
Hindustan Organic Chemicals Limited 300
Hindustan Engg. & Industries Limited 386
Indian Petrochemicals Corporation Limited 12362
Indofil Chemicals Company 328
Lanxess ABS Limited 473
Lubrizol India Private Limited 365
Lupin Laboratories Limited 1661
Merck Limited 99714
Nirma Limited 2244
Pidilite Industries Limited 1044
Rashtriya Chemicals & Fertilizers Limited 952
TATA Chemicals Limited 3517
United phosphorous Limited 363
 ANALYSIS

OF THE

POWER EQUIPMENT

INDUSTRY

37
POWER INDUSTRY OVERVIEW

India's power market is the fifth largest in the world. The power sector is high on India's
priority as it offers tremendous potential for investing companies based on the sheer size
of the market and the returns available on investment capital.

India is witnessing more than 8% growth in GDP for third year in succession. With huge
and rising investment in infrastructure, capacity additions across the industry, the demand
for power is set to escalate on a sustainable basis for years to come. Already, the country
is witnessing widening of demand supply gap, and to fuel the growth, there is urgent need
to scale up power generation and distribution capacities and to reduce transmission and
distribution losses. While significant progress have been made in facilitating private
participation, the weak link remains to be the poor financials of State Electricity Boards
and populist and lack of political will to charge market related rates for residential and
agriculture sector. The ultra mega power projects can partly satisfy the growing demand,
and Central PSUs keep bringing in fresh capacities.

Power sector in India aims to provide power to all by FY 2011-12, to achieve it, a multi-
pronged strategy has been chalked out, which includes:

 Distribution reforms
 Renovation and modernization of old power plants
 Demand-side management and capacity addition.
INDUSTRY STRUCTURE
The power equipment industry can be broadly classified into three segments.

 Power generation equipment such as turbines, generators and boilers.

 Transmission and distribution equipment such as transformers, distributors and
instrumentation and control systems.
 Services for renovation and modernisation.

Though part of the same industry, these segments are different when it comes to business
characteristics.

Analysts reckon power equipment makers/solutions provider to the power sector stand to
benefit from the expected huge expansion in the power generation sector and
transmission & distribution segment over the next few years. Easing copper and steel
prices also bodes well for these firms.
MARKET

INDIAN MARKET
The current installed capacity of power plants is 124, 287 MW (as of March 2006).
Almost 55 percent of this capacity is based on coal, about 10 percent on gas, 26 percent
on hydro, just under 5 percent on renewable sources, about 2.6 percent on nuclear and 1
percent on diesel.

In the past few years, there has been considerable growth in power plants based on
renewable sources of energy. The current installed capacity based on these sources is
about 6,200 MW of total utility capacity. In addition, as the merits of hydro have become
apparent, in an era of high fuel prices, there has been a big push for hydro. An initiative
to add 50,000 MW of hydro capacity by 2017 was announced in 2003. The current
installed capacity, at about 32,000 MW, utilizes just over one -fifth of 150,000 MW hydro
potential.

The Plant Load Factor (PLF) of generating plants has improved consistently over the last
10 years. In 2005-06, the PLF of generating plants was almost 74 percent, compared to
60 percent in 1994-95.

In the past five years, there has been a much greater emphasis on transmission and
distribution reforms. The interregional transmission capacity has been increased to 9,500
MW. The National Grid Development Programme calls for 37,150 MW of interregional
capacity by 2012.

The reform process in the power sector continues. Thirteen states have unbundled SEBs
into separate entities for transmission, distribution and generation. Two states have
privatized distribution. Regulatory authorities have been set up in 24 states. These
authorities are applying commercial principles to tariff setting, monitoring the
performance of state utilities and paying attention to areas such as demand side
management and grid discipline.

The government aims to provide "power to all" by 2012. To achieve that promise, it will
have to add as much as 1,00,000 MW of generation capacity, cut AT&C losses
substantially to below 20 percent, rationalize tariffs and ensure that average revenue
realization is greater than the cost of production. It will have to continue to push the
process of reform and restructuring and ensure greater private participation, in every
segment.

DEMAND AND SUPPLY

As India is a rapidly growing economy, the demand for power is ever rising and thus
cannot be quantified. However, it is very clear from this analysis of this industry that
there exist an acute gap between the supply and ever growing demand.
INDUSTRY DYNAMICS
ELECTRICITY ACT 2003
Electricity Act 2003 has been enacted. The objective is to introduce competition, protect
consumer's interests and provide power for all. The Act provides for National Electricity
Policy, Rural Electrification, Open access in transmission phased open access in
distribution, mandatory SERCs, license free generation and distribution, power trading,
mandatory metering and stringent penalties for theft of electricity.

It is a comprehensive legislation replacing Electricity Act 1910, Electricity Supply Act

1948 and Electricity Regulatory Commission Act 1998. The aim is to push the sector
onto a trajectory of sound commercial growth and to enable the States and the Centre to
move in harmony and coordination.

The Electricity Act 2003 has had a positive effect on the entire sector, including
generation. Overall, this legislation has liberalized generation and freed it from licensing.
The requirement of techno - economic clearance has also been removed. In addition, the
recently announced National Tariff Policy makes it mandatory that all future
requirements of power should be produced through a competitive bidding mechanism
instead of cost-plus route.

The positive environment created by the electricity act and the proactive role-played by
the ministry of power in helping private projects achieve financial closure have led to a
revival of the IPP model.

Seven ultra mega coal based power projects with a capacity of 4000 MW each in the first
phase are on the anvil. These projects will be set up at Sasan in Madhya Pradesh, Mundra
in Gujarat, Akaltara in Chhattisgarh, Karvar in Karnataka, Ratnagiri in Maharashtra,
Krishnapatnam in Karnataka, and in Orissa. For the Orissa project, three sites- Hirma,
Derabahai and Bhashma have been short-listed.

The initial development work (land acquisition, water linkage, EIA studies, preparation of
project report, etc.) is being done through SPV companies, with initial funding provided
by the Power Finance Corporation (PWC). Each company will be a fully owned
subsidiary of PFC. These projects will be awarded on the basis of competitive bidding.
The bidding will be based on the first year of tariff quoted. The projects will be
transferred to the investors by the end of 2006. These projects will entail a total cost of
Rs. 750 billion. They are likely to be financed at debt-equity ratios of 70:30. The cost of
power from these projects is estimated to be about Rs. 2.50- 2.75 per unit.

The recent Indo-US nuclear deal makes nuclear power a much more realistic option for
the future. The centre has given approval for the construction of eight new nuclear
reactors with a combined capacity about 6,800 MW.

The Government plans to add 32,000MW in the tenth plan and an additional 67,500 MW
in the eleventh plan. The capacity addition target for the twelfth plan stands at 66,500
MW.
GENERATION
India's power generation capacity (excluding captive plants) stood at 124,287 MW in
March 2006. Actual generation has grown at a CAGR of about 5.82 per cent in the last
decade from 350,490 MUs in 1995-96 to 617,382 MUs in 2005-06.

The overall generation in the country has increased (Thermal + Nuclear + Hydro) in
public utilities in the country over the years is as under:
GENERATION (BILLION
YEAR
UNITS)
1990-91 264.3
1995-96 380.1
2000-01 499.5
2001-02 515.3
2002-03 531.4
2003-04 558.3
2004-05 587.4
2005-06 (Upto Feb. 2006) 562.7
Source: Annual Report 2005-06, Ministry of Power

The bulk of the capacity is thermal (coal, gas, liquid fuel and diesel). Thermal plants
contribute 66.3 percent to overall capacity. Of this coal contributes 55 percent of the
capacity, gas another 10 percent, while the rest (1 percent) is based on diesel.

Over the years, the fuel mix has changed. The share of power from thermal sources
decreased from 71 percent in 1994-95 to 66.3 percent in 2005-06. The share of hydro has
increased from 25.7 percent to 26 percent. Growing environmental concerns have led to
an interest in renewable sources of energy (comprising wind energy, solar photovoltaic
energy, biomass power and mini hydro plants). But despite great potential, renewable
sources contribute only a little over 6,000 MW at present.

The contribution of the private sector to installed generation capacity was 14, 139 MW or
11.3 percent in 2005-06. Amongst the private players, Tata Power has the highest
installed capacity at 2,300 MW. In terms of actual generation, private contribution is 8.7
percent. There is renewed interest in IPPs in the power sector. Private IPPs contributed
5,961 MW to installed generation capacity in March 2006.

The PLF of generating plants has improved consistently over the last few years. The all
India average PLF on March 2006 stood at 73.6 percent compared to 60 percent in 1994-
95. The PLF of central plants in 2005-06 was 82.1 percent while the average PLF of the
state sector units was close to 67 percent. The average PLF of the private sector was 85.4
percent in 2005-06.
Drivers of power generation are:

 Orders from new power projects and is thus heavily dependent on their
commissioning.
 Replacement demand is limited and restricted to renovation and modernisation.

Being heavy capital equipment they have a long manufacturing time cycle. Typically, the
manufacture of a turbine/generator for a 500 MW plant would take about 36-42 months
from the order's date. The approximate value of such equipment would be about Rs 2,000
crore.

Technology in this segment is mature and there have been few developments in turbine or
generator technology in the last two decades. The last major development in turbine
technology was the development of gas turbines by General Electric in the 1980s. Since
then there have been rapid improvements in gas turbine technology but there has been
nothing radical or path-breaking. There are just a handful of companies in the whole
world in this business such as,

 GE
 Siemens
 Alstom
 Mitsubishi

They are either present on their own in different countries across the world or they license
their technology to others.

TRANSMISSION
Transmission lines have grown from 3,708 ct. Km in 1950 to more than 2,64,240 ct. km
in 2005. In the last four years, the network has grown by about 12.5 percent. It is
projected to grow to 3,50,000 ct. km.

Transmission projects continue to be accorded a high priority in the context of the need to
evacuate power from generating stations to load centres, system strengthening and
creation of National Grid. The construction targets of transmission projects for the year
2005-06 and the achievements up to December 2005 are summarized below:

Parameter MOU Target Achievement upto Percentage of

(Excellent) December 2005 Achievement

No. of Ckt Kms.

Ready for
commissioning 3800 4040 106.00%

Transformation
Capacity Addition 4885 4670 95.50%
Transmission lines and sub-stations completed during the year 2005-06 (upto December
2005) are shown in the following table:

Sr.No Name of the line/Sub station Voltage

class

Ia Transmission Lines

1.0 Rihand- Allahabad-Mainpuri D/c line 400 Kv

2.0 Mainpuri-Ballabgarh D/c line 400 Kv

3.0 Patiala- Malerkotla S/C line 400 kV

4.0 LILO of Nalagarh-Hissar at Patiala & Kaithal D/C 400 Kv

5.0 Raipur- Chandrapur D/C 400 kV

6.0 LILO of Bongaigaon –Malda at Siliguri D/C 400 kV

7.0 Madurai- Thiruvananthapuram D/C 400 kV

Dhauliganga (NHPC) –Bareily (UPPCL) D/C 400 kV

8.0 (to be initially charged at 220 KV level)

9.0 Tarapur 3&4- Boisor D/C transmission Line 400 kV

10.0 Tarapur 3&4 –Padghe D/C transmission line (Ckt –II) 400 kV

11.0 LILO of S/C Gandhar – Padghe line at Boisor 400 kV

12.0 Kaiga – Narendra D/C Line 400 kV

13.0 LILO of S/C Gandhar – Padghe at Vapi 400 kV

14.0 LILO of S/C Nagarjunsagar –Raichur at Mahaboobnagar 400 kV

15.0 Meerut (POWERGRID)- Shatabdi Nagar S/C line 220kV

16.0 Tarapur 3&4 – Boisor S/C Tr. Line 220kV

17.0 LILO of D/C Siliguri- Gangtok at Melli 132kV

18.0 LILO of 1st Ckt. Of D/C Siliguri- Rangit at Gangtok (New) 132kV

Ib) Other
Schemes
 Sr.No Name of the line/Sub station Voltage
class

1.0 ULDC –ER

2.0 ULDC –WR

3.0 Series Compensation at Rengali

II New Sub-Stations

1.0 Thiruvananthpuram 400/220 Kv

2.0 Mainpuri 400/220 Kv

3.0 Vapi 400/220 kV

4.0 Boisor 400/220 Kv

5.0 Kaithal 400/220 kV

6.0 Patiala 400/220 kV

7.0 Narendra 400/220 kV

8.0 Baripada 220/132 kV

9.0 Gangtok 220/132 kV

GROWTH DRIVERS
 Unlike the generation equipment segment the T&D equipment business relies
equally on new orders and replacement demand. It has been able to survive even
in the complicated business environment of the last decade thanks to business
from the replacement market. Of course, the replacement market is not as large as
it should be for the installed capacity of 1 lakh MW in the country because of the
absence of a good renovation and maintenance programme in most power plants.
 The companies engaged in laying of power transmission lines in India historically
had been getting business of laying power transmission lines at Middle East /
North Africa on account of being cost competitive. Lately companies engaged in
laying of power transmission lines in India have been getting business of laying
power transmission lines at Middle East / North Africa due to increase in income
level of this region on account of increase in oil prices / due to reconstruction
activity undertaken in countries like Iraq.

Restrictions on Growth
The orders for laying of power transmission lines historically were mainly received from
SEBs (are incurring losses and have track record of delayed payments of retention
money). This resulted in restricted business opportunities for the companies in India
engaged in power transmission line business.

This segment is highly competitive, especially as one goes down the value chain. For
small products such as distribution transformers and energy meters there is tremendous
competition that thins out in the high value/high technology products. Competition is
more even here between BHEL and MNCs such as ABB, Siemens and Alstom. After the
worldwide divorce between ABB and Siemens in 2000, ABB now concentrates on the
transmission and distribution business leaving the generation equipment area to Alstom.

DISTRIBUTION
The demand for electrical energy is ever increasing. Today over 21% of the total
electrical energy generated in India is lost in transmission (4-6%) and distribution (15-
18%). The electrical power deficit in the country is currently about 18%. Clearly,
reduction in distribution losses can reduce this deficit significantly. It is possible to bring
down the distribution losses to a 6-8 % level in India with the help of newer technological
options (including information technology) in the electrical power distribution sector that
will enable better monitoring and control.

Electric power is normally generated at 11-25kV in a power station. To transmit over long
distances, it is then stepped-up to 400kV, 220kV or 132kV as necessary. Power is carried
through a transmission network of high voltage lines. Usually, these lines run into
hundreds of kilometres and deliver the power into a common power pool called the grid.
The grid is connected to load centres (cities) through a sub-transmission network of
normally 33kV (or sometimes 66kV) lines. These lines terminate into a 33kV (or 66kV)
substation, where the voltage is stepped-down to 11kV for power distribution to load
points through a distribution network of lines at 11kV and lower.

Distribution Companies
With State Electricity Boards (SEBs) having to restructure themselves following the
passage of the Electricity Act, 2003, the power sector has undergone a significant
structural change. A key constituent of the evolving industry structure in each State will
be the Distribution Companies (DISCOMs), which will be providing the “last mile”
connectivity to the final consumers, both retail and wholesale. Several large players in the
power sector plan to acquire majority stakes in the state owned DISCOMs once they are
up for privatisation. While traditionally, DISCOMs have been purchasing power from the
State Transmission Utilities (Transcos) —usually the successors of the SEBs—through
long-term power purchase agreements (PPAs), the procurement pattern could also
undergo a change with the Electricity Act, 2003 allowing freedom to licensees to source
power from any source. Also since Transcos are not allowed to trade in power as per the
Electricity Act, 2003, the PPAs would also need to be reassigned.

The demographic profile of the service area that a DISCOM serves determines the quality
of cash flows, as well as the extent of likely threat from competition. Given the level of
cross-subsidy currently prevalent in the tariff structure, a high proportion of agricultural
consumption inevitably implies greater burden of subsidy payment on the State
Government, as well as relatively higher levels of cross-subsidy. At the same time, a
higher proportion of Commercial and High Tension(HT) segment in the consumer mix
implies greater vulnerability to competition in a liberal regime for captive power plants
(CPPs) and in an open access scenario that allows freedom to consumers to source power
from alternative sources. The key determinants of demographic profile are:

 Proportion of various consuming segments

 Growth rates in different segments
 Extent of agricultural consumption
 Geographical dispersion of HT consumers

The extent of geographical dispersion within the HT segment is an indicator of

concentration risk and hence competitive threats. ICRA also assesses the steps being
taken by the utilities /State Government to minimise the impact of high paying consumers
switching from the incumbent licensee. ICRA notes, for instance, that utilities in some
states have initiated supply of power to HT industrial consumers through a special
incentive scheme at tariffs that are substantially lower than the normal tariff levels
applicable for such consumers. Further, some State Governments have been levying taxes
on captive power generation, which also mitigates the threat from CPPs to an extent,
although questions remain about the sustainability of such measures.

The major power equipment makers in the distribution segment are,

Company Name Sales

EMCO 405.37
Bharat Bijlee 300.29
Voltamp Trans 248.79
Accurate Trans. 150.74
Indo Tech 97.34
Trans. & Elec. 82.90
RTS Power Corpn 78.01
IMP Powers 67.40

Services
Services is a lucrative activity given the large installed base and it is not surprising that
MNCs such as Alstom and ABB are rather active in this business. Here again, the market
has not really taken off as it should have and the reasons are familiar. State electricity
boards that own the majority of the stations in need of renovation and modernisation are
in no position to use the limited funds they generate in R&M activity. That this market is
lucrative is evident from the two joint ventures floated by BHEL with GE (BHEL-GE
Gas Turbine Services Ltd) and Siemens (Powerplant Performance Improvement Ltd).
These two companies service the existing installations based on their respective
technologies. A measure of their success is that both these companies are doing very well
financially, with one of them declaring a 95 per cent dividend for 2000-01. Others such as
Alstom are equally active in this business. In fact, it is these areas that provide them with
business in this difficult environment.

Towards Formation of National Grid

Ministry of Power has envisaged establishment of an integrated National Grid in the
country by the year 2012 with an inter regional power transfer capacity of about 37,150
MW (enhanced from earlier planned target of 30,000 MW). A perspective transmission
plan has been evolved for strengthening the regional grids with the ultimate objective of
establishment of strong and vibrant National Power Grid to support the generation
capacity addition program of about 1,00,000 MW during the tenth and eleventh plans.

Private Sector Participation in Transmission

The first major step towards encouraging private investment in the power sector was
taken in 1991 by providing a legal framework through an amendment of the then existing
Electricity (Supply) Act, 1948 enabling private sector participation in generation.
Subsequently, a definite tariff framework was also put in place through notification issued
by the government of India.

POWERGRID has established First Public -Private joint venture in Indian Power sector
with M/s Tata Power (POWERGRID's stake is 49 percent and M/s Tata Power's stake is
51 percent in the joint venture company viz. "Powerlinks Transmission Limited") for
implementation of major transmission lines of Transmission System associated with Tala
HEP in Bhutan, East-North inter connector and northern region transmission costing
about Rs. 1612Crore. This letter received excellent response from International Funding
Institutions like IFC, Washington including multilateral financing from private sector arm
of ADB, Manila, and Indian Financial Institutions like IDFC and SBI.

The JV Company has received its transmission license from CERC, the first such license
in Indian Power Sector. Financial closure of the project was achieved in May 2004. A
debt of Rs. 980mCrore has been tied up with the consortium of multilateral and domestic
financial institutions.

Action has been initiated to bring in more private investment in transmission projects and
two more projects. For example: transmission systems associated with Koldam and
Parbati- II (Estimated Cost: Rs.660 Crore) have been floated under joint venture route.
In addition, some transmission lines under Western Region Strengthening Scheme are
envisaged to be implemented through 100 percent private sector participation (IPTC).
Ministry of Power is in the process of finalizing policy guidelines for private investment
in transmission.
ENTRY BARRIERS
As the number of companies in power transmission line sector in India is low (as there
are high entry barriers on account of power transmission line projects being awarded on
the basis of project execution track record), leading companies like KPTL will reap the
benefits of growth in power transmission line sector in India. Also the trend in the power
transmission line sector in India is increasingly to go for laying of HVDC power
transmission lines, where transmission and distribution losses are lower, thereby KPTL
would be again benefited as very few companies including KPTL along with global
majors like ABB have expertise in HVDC power transmission lines.
RISK & CONSTRAINT

CHINESE Threats to POWER EQUIPMENT Industry

Chinese electrical equipment manufacturers are set to enter India due to the ultra mega
power projects (UMPPs) and the renewed interest in India’s power sector. Companies
such as Dongfang, Chint Electrics, Wenzhou Hezhong and China National may claim a
sizeable stake in India’s electrical power spectrum, if talks with domestic players
succeed.

Dongfang is planning to tie up with Lanco Infratech, which outbid players to win the
country’s first UMPP at Sasan, for supplying super critical boilers. But Dongfang has to
get licence to sell its products outside China and talks are currently on. Chint and
Wenzhou Hezhong are evaluating the opportunities and may start equipment supply to
medium-scale projects in the country. China National had held talks with two power
generation companies, though they are yet to materialise.

At present, out of 95 private power projects, 58 projects for around 36,000-mega watt
(MW) capacity have foreign developers. As per the information available, around Rs
10,500 crore foreign investments has already been made in the private power sector.
Global majors such as Siemens, Samsung, LG, ABB and Areva have units in India. As of
now, the presence of Chinese companies in the power sector is marginal, but this scenario
may change when the other UMPP bids are finalised,.

Encouraged by the response to the first two UMPPs, the government plans to award three
more UMPPs in 2007. The first project, Krishnapatnam in Andhra Pradesh, is targeted for
award in April 2007, second one in May-June 2007 and third by the year-end.

Chinese companies are now looking at opportunities outside their country. Once the
growth within China is saturated, these companies will have to find new markets.
Comparing the economy growth and market potential, both India and China have many
similarities.

The south Asia region, consisting of Bangladesh, Bhutan, India, the Maldives, Nepal,
Pakistan and Sri Lanka, is witnessing rapid growth in energy demand. With a 1.4 billion
population, this region constitutes almost one-fifth of the world population. But half of
this population still lives in darkness. “Traditionally, Chinese companies were considered
to be weak in after-sales-service. But the situation is changing This may lead to Indian
companies importing equipment from China at competitive prices.

With the government’s commitment to scale-up capacity, Chinese players are now taking
a serious look at the Indian market. With a project of 4,000 MW on hand, Dongfang may
consider setting up a stronger base in India. If the Sasan project proves successful, more
Chinese investments can be expected, and Bhel’s market share in new projects may come
under pressure.
INVESTMENT REQUIREMENTS
Investment needs in the power sector:
 New Power Plants – Rs. 150,000 Crs
 Transmission Line – Rs. 71,000 Crs
 Renovation of Old power plants – Rs. 100,000 Crs

Investment Opportunities and Potential

According to Central Electricity Authority's sixteenth electric power survey, peak demand
is expected to increase by a staggering 77 percent to 157,107 MW by 2012. Similarly, the
energy requirement is also expected to increase by 274 percent to 975,222 MU by 2012.
It is estimated that a capacity addition of over 100,000 MW units by 2012 to bridge the
supply deficit and keep up with the increasing demand. The total investment required in
capacity creation, along with necessary investments in transmission and distribution
segments is estimated at US$ 200 billion. This quantum of investment calls forth public
-private partnerships in the sector.

 Hydro Projects
 Sixty eight percent, i.e., 101,454 MW of potential capacity is still not
developed.
 Seventy-seven schemes with a cumulative total of 33,000 MW have been
identified.
 Captive Power
 At present, CPP accounts only for fifteen percent, i.e., 22,100 MW of total
combined capacity. Government plans to bring further 5000 MW into
mainstream.
 "Open Access" and "Group Captive" allowed under recent policy
initiatives.
 Ultra Mega Power Projects
 Seven projects with an individual capacity of 4000 MW, requiring an
investment of approximately US$ 3.26 billion (INR 15,000 crore) each
have been identified.
 Nuclear Power
 In the post indo-US agreement period, there is scope for private -public
partnership in this sector
 National Grid Program
 The program envisages addition of over 60,000 ckm of transmission
network in a phased manner by 2012 with an estimated investment of
about US$ 15.18 billion. Of this about US$ 4.33 billion is ought to be
mobilized through private participation.
 Distribution: with respect to distribution, the following opportunities exist
a) Rural Electrification
b) Privatization of Discoms
c) Participation under Franchise Model
  Trading
 "Power Pools" system has been established to facilitate trading
opportunities for licenses.
 Renewables
 Existing untapped wind energy potential of 45,000 MW.
 Untapped Bio-power potential of 52,000 MW.
 Untapped Cogeneration- bagasse based potential of 5000 MW.

Investment Policy
The 1991 Power Policy seeks to attract significant private sector investment in the Indian
power sector. The key initiatives include:

 Private sector permitted to set up cool, gas or liquid based thermal project, hydel
projects and wind or solar projects of any size.
 Foreign equity participation brought under automatic approval of generation,
transmission and distribution of power generated in hydro-electric, oil based and
coal/lignite based power projects.
 Role of the Central Government curtailed and the State Governments and State
Electricity Boards (SEBs) empowered to negotiate directly with developers,
facilitating speedy clearances for the investor.
 Ancillary sector such as cool significantly deregulated.
 100% foreign equity permitted.

Opportunities

Demand is expected to grow to 570 billion Kwh by 2001-02 and to 782 billion Kwh by
2006-07. Over the 10 year period from 1997-2007, a total capacity addition of 98,000
MW is envisaged, entailing an investment of Rs. 5,750 billion in power generation,
transmission and distribution.

The specific project opportunities expected in the near future include:

Liquid Fuel Based Projects using low sulphur heavy stock (LSHS), furnace oil (FO),
heavy petroleum stock (HPS), Naphtha, Vacuum Residue, Condensate and Orimulsion
are permitted by the Government. Import of liquified natural gas (LNG) is also being
considered for setting up large capacity combined cycle power plants, Transmission
projects for power transfer are available for competitive bidding by the Central
Transmission Utility (Power Grid) and State Transmission Utilities (SEBs)/Grid
Corporations). The transmission system project are being identified for competitive
bidding by the Central and State Transmission Utilities.

Attractive investment opportunities are likely to develop in distribution of power as

several State governments have agreed to allow the gradual entry of the private sector in
distribution.
Non-Conventional Energy Sources

Investment Policy

Foreign Investors can enter into a joint venture with an Indian partner for financial and/or
technical collaboration and also for setting up of renewable energy based power
generation projects. The liberalized foreign investment approval regime is aimed at
facilitating foreign investment and transfer of technology through joint ventures.
100% foreign investment as equity is permissible.

Government of India encouraging foreign investors to set up renewable energy based

power generation project on Build-Own-Operate basis.
GOVERNMENT POLICY

Policy Initiatives
✔ 100 percent foreign equity participation is allowed under the automatic approval
route in all segments of the industry (except atomic energy).
✔ Generation and distribution power projects of any type and size are allowed
✔ The electricity act 2003 allows trading in power and provides for further
deregulation.
✔ A renewable license period of 30 years has been set.
✔ Return on equity up to 16 percent is assured at 68.5 percent PLF for thermal power
plants. Similar incentives are provided for hydroelectric power projects.
✔ Import duty at the concessional rate of 20 percent has been set for import of
equipment.
✔ The government allows a 5-year tax holiday for power generating projects with an
additional five years in which a deduction of 30 percent taxable profits is allowed.

Major Policy Initiatives to Streamline the Process of Project Development

 Captive Power Plants: under the electricity act 2003, captive power plants,
including group captive, have been freely permitted. The act provides that any
person may construct, maintain or operate a captive generating plant and
dedicated transmission lines. Further, under the provisions of the act, every
person, who has constructed a captive generating plant and maintains and operates
such plant, shall have the right to open access for the purpose of carrying
electricity from his captive generating plant to the destination of his use subject to
the availability of transmission capacity.

 Open Access to Transmission: under the provisions of electricity act 2003, open
access in transmission has been introduced to promote competition amongst the
generating companies who can now sell to different distribution licensees across
the country. Open access has been made available to captive generating plants
subject to availability of transmission capacity.

 No Techno-Economic Clearance for Thermal Generation: generation has been

delicensed under the Electricity Act 2003. The requirement of techno economic
clearance of CEA for thermal power plants has also been done away with. The
intention is to provide enough freedom and flexibility in the system for promoters
of power plants to put up generating stations.

 Setting up of Mega Power Projects: to facilitate setting up of large sized thermal

power plants in the country and in order to derive the economies of scale, the
Ministry of Power issued guidelines in November 1995 for setting up of mega
power projects. Power projects having a capacity of 1000MW or above and
supplying power to more than one state were defined as mega projects. After
considering the experience of this policy, the policy was revised in 1998. Under
the revised policy, specific inter-state and inter-regional mega power projects
 were identified for being developed in both- public and private sector. A Power
Trading Company (PTC) has been established to purchase power from the private
sector mega projects and sell it to the beneficiary states. The policy has been
further liberalized and with effect from 1.3.2003, all inter-state projects with a
capacity of 1000MW and above for thermal and 500 MW and above for hydel
projects are being treated as mega power projects subject to fulfillment of
required conditions and would be extended the concession of "Zero" customs duty
on import of capital goods.

 Automatic Approval for Foreign Direct Investment (FDI); in order to facilitate

FDI, automatic approval (RBI route) for 100 percent foreign equity without any
upper ceiling on the quantum of investment is permitted in all sectors of the
power sector, i.e., generation, transmission and distribution of electricity.

 Generating Company Permitted to Distribute Electricity in Rural Areas: Section

14 of the Electricity Act, 2003 allows any generator of electricity to distribute
electricity in a rural area without the requirement of any license, subject to
compliance with measures as may be specified by the Central Electricity
Authority under section 53.

 Setting up of Independent Regulatory Mechanism: CERC and SERC

The Central Electricity Regulatory Commission (CERC), an independent

statutory body with quasi-judicial powers, was constituted on 25th July 1998
under the provisions of section 76 of the Electricity Act, 2003.

State Electricity Regulatory Commissions (SERC) have been established under

the provisions of the ERC Act1998 or under respective state reforms acts. These
SERCs have been continued under the provisions of electricity act 2003.

 Appellate Tribunal for Electricity: under the provisions of section 110 of the
electricity Act, 2003, the Appellate Tribunal for Electricity has been established at
Delhi which will hear appeals against the orders of the Adjudicating officer or the
appropriate Regulatory Commission under the Act. The Tribunal has become
operational from 21st July 2005. The Tribunal comprises of chairperson &
judicial member, Judicial Member, 2 Technical Members.
KEY PLAYERS

Players in the Indian power industry are as follows:

Chattisgarh State Electricity Board

EMCO
Enercon
Euromoney Energy
Delhi Control Devices
Deutz Power
FICCI
Honeywell
HPL Socomec
IEEMA
IREDA
Jaiprakash Industries
Jharkhand State Electricity Board
KLG Systel
Lapp Kabel
Megger
NDPL
NTPC
Nuclear Power Corporation of India
Powergen
Power Grid Corporation
Power Trading Corporation
Reliance (BSES Rajdhani Power)
Rockwell Automation
Safcon
Suzlon
Taurus Powertronics
Teledata Informatics
Vestas RRB
West Bengal State Electricity Board
FUTURE OUTLOOK
Ultra Mega Power Projects
As a part of the planned target of 1,00,000 MW of capacity addition by 2012, the
government has announced the setting up of five ultra mega power projects (4000 MW
each). All these projects are planned to be commissioned during the 11th Plan (2008-12).
The government has also provided sops for these ultra mega power projects in the form
of extension of tax exemptions under sec 80 IA. All the five plants are coal based; three
of them are based on imported coal while the rest are based on indigenous coal.

The Government of India has envisaged a capacity addition of 1,00,000 MW to meet its
mission of ‘Power For All by 2012’. Achievement of this target requires the development
of large capacity projects at the national level to meet the requirements of a number of
States. Recognizing the fact that economies of scale leading to cheaper power can be
secured through development of large-size power projects using super critical technology,
Ministry of Power, CEA and PFC are working together for development of 7 Ultra Mega
Power Projects (UMPPs) through tariff-based competitive bidding. These UMPPs, each
with a capacity of about 4000 MW, would also have scope for further expansion. These
UMPPs will add about 28,000 MW within a span of 7-8 years and help in achievement of
the targets for faster capacity addition. The fund requirement for the proposed 7 projects
is estimated to be around Rs.1,25,000 crores.

These projects would be awarded to developers on Build, Own, and Operate (BOO)
basis. The size of these projects being large, they will meet the power needs of a number
of States through transmission of power on regional and national basis.

Apart from these, there are two new ultra mega power projects announced; one each in
Orissa and Andhra Pradesh. As per the 70:30 debt-equity norm, funds of around Rs
1,05,000 crs will be needed to be pumped in. This leaves a huge window of
opportunity for the financing sector. The government has invited bids for the first
five ultra mega power projects. It has also approached the Asian Development
Bank (ADB) for funding these projects. Power Finance Corporation has evinced
interest in funding one of them. The finance minister had announced in Union Budget
2006-07 that all the projects would achieve financial closure by the end of 2006-07.

The initialing of Power Purchase Agreements (PPAs) between Sasan Power Ltd., &
Coastal Gujarat Power Ltd., and authorized representatives on behalf of 22 Distribution
Companies of 9 States took place on 9th Oct., 2006 at New Delhi. The beneficiary States
are; Delhi, Gujarat, Haryana, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Uttar
Pradesh and Uttaranchal. It is for the first time in the history of Indian Power Sector that
PPAs are being initialed for a capacity of this magnitude i.e. 8000 MW.

Lanco Infra has emerged as the lowest bidder for Sasan Ultra mega power plant, which
has a capacity of almost 4000 megawatt while TATA Power has emerged as lowest
bidders for the Coastal Gujarat Power Ltd.
 The initialing of PPAs for 8000 MW capacity addition through tariff-based competitive
bidding marks the beginning of a new approach to capacity addition which will facilitate
private investment at a faster pace and provide power at the most competitive rates.

Brief details about five the Ultra Mega Power Projects are as below,
Ultra mega power projects
Rs Crs
Project Units Cost Location Fuel Fuel imports Allocation
Coastal 5x800 15,000 Maharashtra Imported Australia, South- Rajasthan, MP
Maharashtra coal east Asia
Mega Power Ltd Africa or China Chhattisgarh
Maharashtra
Karnataka
Coastal Karnataka 5x800 15,000 Karnataka Imported Australia, South- Rajasthan, TN
coal east Asia
Power Ltd Africa or China Kerala
Maharashtra
Karnataka
Coastal Gujarat 5x800 15,000 Gujarat Imported NA UP, Punjab,
Power Ltd coal
Rajasthan
Haryana
Gujarat
Maharashtra
Akaltara Power 5x800 15,000 Chhattisgar Indigenou
Ltd h s coal

Sasan Power Ltd 5x800 15,000 MP Indigenou UP, Delhi

s coal
Uttranchal
Punjab
Rajasthan
Haryana
MP, Chhattisgarh
75,000

RECOMMENDATIONS
This is a very important industry, as its growth is directly related to the development of
all other sectors of country’s economy. It is a ever growing sector. Non-renewable
sources of power generation is the need of the hour and hence, investment in this sector
will yield colourful results.
LIST OF COMPANIES
Following are the short-listed companies in the industry, which can be targeted by HDFC
Bank, to establish business relations with. Following companies are sorted from large
databases on the basis of following parameter: turnover, networth and profitability.
Following companies satisfied the above mentioned criteria:

COMPANY NAME TURNOVER(RS INR CRORES)

ABB 29630
ABG Heavy Inds. 602
ACC Machinery Co 326
Advance Power 753
Alfa Laval (I) 5778
Alstom Projects 9456
Amara Raja Batt 3917
Anup Engineering 304
Areva T&D 8695
Ashoka Buildcon 1650
Asian Electronic 1558
Assam Carbon Pr 367
Atlanta 1071
Audco India 4649
B E Billimoria 1329
BHEL 134426
Batliboi 1006
Bharat Bijlee 3003
Biecco Lawrie 345
Birla Power Sol. 929
Chemtrols 320
Controls &Switch 948
Crompton Greaves 25416
CTR Mfg.Inds. 459
Disa India 433
ECE Inds. 892
Eimco Elecon(I) 910
Elecon Engg.Co 4565
Elpro Intl. 585
EMCO 4053
Engineering Proj 5119
Engineers India 7927
Ewac Alloys 586
Flat Product Eq. 2860
Flex Engineering 394
G R Engineering 495
Gansons 387
Gei Hamon Inds 691
GMM Pfaudler 1016
Guj. Apollo Eq. 1060
Gwalior Tanks 575
Hercules Hoists 641
Hind.Aeronautics 45436
Hind.Dorr-Oliver 1414
Honda Siel Power 1965
Howrah Trading 1350
IDMC 400
IMP Powers 674
Indian Oiltank. 1833
Intl. Combustion 672
Intl. Conveyors 344
Jaihind Projects 620
Jaya Hind Sciaky 389
Jord Engineers 835
Jyoti 1039
Kabra Extrusion 1005
Kanohar Elect. 323
Kilburn Engg. 658
Kirl. Brothers 9201
Kirl. Electric 4140
Koch Glitsch 350
KSB Pumps 3585
L & T-Komatsu 3763
Larsen & Toubro 147400
Lubi Electricals 456
M & P Pumps 618
Manugraph India 3180
Mazda 365
MDS Switchgear 707
Mercantile Ind 806
Modern Insulator 1404
Modison Metals 529
New Consol Const 715
Oriental Civil 339
OTIS Elevator 5182
Petron Engg 3027
Praj Inds. 2599
Precision Gears 429
Projects & Dev 420
Rajoo Engineers 304
Reliance Ind.Inf 645

Rishi Laser Cutt 340

RTS Power Corpn 780
San Engg. & Loco 304
Sanghvi Movers 1491
Sayaji Iron 452
Shakti Pumps 477
Shanthi Gears 1623
Simplex Engg. 897
Stewarts & Lloyd 1075
Stone India 530
Sulzer India 555
Sulzer Pumps Ind 1224
Sunil Hitech 1327
Supreme Infra 463
Suzlon Energy 37885
TAL Manuf. Sol. 685
Tata Liebert 1149
Tata Projects 4491
Thermax Babcock 1381
TIL 4361
Toyo Engineering 4672
TRF 2146
UB Engg. 2291
Uhde India 2099
Vijay Tanks &Ves 1149
Virgo Engineers 447
Voltamp Trans 1744
Voltas Inter. 1361
W I Inds. 592
W M I Cranes 360
Walchan. Inds. 2528
Windsor Machines 1000
WPIL 733
 ANALYSIS OF

AUTO ANCILLARY INDUSTRY

62
INDIAN AUTO ANCILLARY INDUSTRY
Auto ancillary industry consists of manufacturers in the auto ancillary sector supplying
auto accessories to original equipment manufacturers (OEM) and the replacement
market. The auto ancillary industry plays a crucial role in the automobile sector as
manufacturing vehicles typically involve assembling a large number of components out-
sourced from small-scale manufacturers. The Global Auto component industry is
currently pegged at USD 1.70 trillion (Source: ACMA Industry Summary Auto Industry)

The Automotive Component Manufactures Association (ACMA) classifies the auto

ancillary industry into the following product segments:

 Engine Parts (Pistons, piston rings, piston pins, gaskets, carburetors, fuel injection
pumps, etc.) - 31%; Drive Transmission and Steering Components (Transmission
gears, steering gears, crown wheels and pinions, axles, wheels, etc.) - 19%;

 Suspension and Braking Components (Leaf springs, shock absorbers, brake

assemblies, etc.) 12%; Body & Chassis (12%);

 Equipment (Dashboard instruments, headlights, horns, wipers, etc. ) 10%;

Electrical Components (Spark plugs, starter motors, generators, distributors,
voltage regulators, flywheel magnetos, ignition coils, etc.) 9%; and

 Others (Fan belts, sheet metal parts, plastic mouldings, etc.) 7%.
(Source: ACMA)

Sources of Demand
The market for automotive components can be segmented into the following categories
based largely on the identity of the buyer:

Demand from Original Equipment Manufacturers

The pattern of growth in the automotive industry has a very significant influence on the
performance of the automotive components segment. This is because the components
content per vehicle differs significantly across vehicle categories. Demand for larger and
higher-value automobiles implies higher demand for ancillary units.

Replacement Demand
The huge unorganized sector typically caters for the demand emanating from the
replacement market. The unorganized sector in turn is a low-cost one, given that its fiscal
liabilities (in terms of excise duties) are low. As a result, this sector is able to supply the
replacement market with significantly lower-priced parts vis-à-vis those produced by the
organized sector. The aftermarket is highly competitive for components with a high price
elasticity of demand and a tolerance of lower quality standards. A major channel of
marketing and distribution for this sector is the typical roadside mechanic. Interestingly,
the unorganized sector has recently shown the technical competence to even replicate
some of the relatively sophisticated components.
Five factors primarily influence the aggregate annual demand for replacement parts:
 Size of National Vehicle Population: More the number of vehicles, higher the
aggregate demand for replacement parts.

 Average Age of National Vehicle Population: A longer use of the vehicle would
ensure higher replacement demand.

 Average Number of Kilometers Driven per Vehicle: The demand for

replacement parts would increase as the wear associated with higher mileage of
vehicles per year increases.

 Road Infrastructure: It is estimated that around 2% of the road length in the

country carries about 40% of the road traffic. This has led to deteriorating driving
conditions like increased traffic congestion and low vehicular speed, besides
higher pollution levels. While increasing fuel consumption, low speed also adds to
the wear and tear of most automotive components.

 Driving Conditions: Besides congestion, the poor average quality of Indian

roads is a significant factor adding to the wear and tear of vehicular parts. For
instance, internationally, axles are not high-replacement demand products.
However, in India, because of the poor quality of roads, axles have a high
replacement demand.

Currently the demand for ancillaries arises from OEM market (60%) and replacement
market (40%).
INDUSTRY STRUCTURE
The total turnover of the Indian auto component industry is estimated at US$9 bn in
2006. The industry has the resources to manufacture the entire range of auto products
required for vehicle manufacturing, approximately 20,000 components. The entry of
global manufacturers into India during the 1990s enabled induction of new technologies,
new products, improved quality and better efficiencies in operations. This in turn
effectively acted as a catalyst to the local development of the component industry.

The Indian auto component industry is extensive and highly fragmented. Estimates by the
Department of Heavy Industries, Government of India, indicate there are over 400 large
firms who are part of the organised sector and cater largely to the Original Equipment
Manufacturers (OEMs). Another 10,000 firms exist in the unorganised sector that
operates in a tier-format. The firms in this segment operate in low technology products
and cater to Tier I and Tier II suppliers and also serve the replacement market

Around 4% of the companies operating in the auto component segment cater to 80% of
the demand emanating from OEMs. Within the unorganised segment, apart from
supplying in the aftermarket, a number of players are also involved in job work and
contract manufacturing.

Source: ACMA
The range of products manufactured, with each broad product segment having a different
market structure and technology, has negated any possible concentration of the market in
a few hands. The market is so large and diverse that a large number of players can be
absorbed to accommodate buyer needs. However, there are a select few large companies
that have integrated their operations across the value chain. The key to competing in this
industry is through specialisation by product-type, and integrating operations across the
related area of specialization.

An interesting insight provided by a study conducted by the National Council of Applied

Economic Research revealed that the market segments for auto components included
OEMs constituting 33%, local components having 25% with the balance 42% comprising
of spurious market including re-conditioned parts. A large part of the spurious or grey
market companies are in the unorganised sector.

The regional base of auto component manufacturers is mostly concentrated in the West,
North and South of India. This regional concentration of auto component manufacturers
has been dictated by the emergence of automobile manufacturers in these regions. The set
up of Tata Motors, Bajaj, Mahindra & Mahindra and TVS in the 1950s and 1960s laid the
foundation for auto component manufacturers in the West and South, whilst the entry of
Maruti during the 1980s created the base in the North.

MARKET

Auto component Industry in India

According to the Automotive Component Manufacturers Association of India (ACMA),

the production of Indian automotive components industry was US$ 8.7 billion in 2004-
05. In 2004-05 Exports touched US$ 1.4 billion, accounting for 16 per cent of the total
production. The industry has been growing at an estimated compounded annual growth
rate of 16.4 per cent over the past seven years (1998-2005) owing to strong domestic
volumes and robust growth in exports. The Industry is expected to grow at CAGR of 15%
till 2012. (Source: ACME, Sourcing Auto Components- Destination India).Even though
the Indian automotive components industry is relatively small by global standards, there
are close to 400 players in the organized sector and over 5,000 in the unorganized sector
competing against each other for market share. However, the share of the organizedsector
has increased over time. Players in the organized sector supply the vehicle manufacturers
directly. The unorganized sector, on the other hand, mostly has small units, producing
low-technology components. (Source: http://www.osec.ch) The production, Investment
and Export trend in the Indian Auto components industry during the last 10 years is given
below:
Production of Automotive Components
Till the 1990s, the auto component industry was solely dependent on the domestic
automobile industry to drive the demand for ancillary products. This composition of the
market however is undergoing radical changes with global outsourcing gaining
momentum. In recent times, exports has emerged as a significant driver of growth, and
the demand emanating from global OEMs and Tier I manufacturers has opened new
opportunities for the auto component industry in India. At the same time, a bright outlook
for the domestic automobile industry also offers significant growth potential, given the
fast rising income levels with a rapidly growing middle and high income consumers.

But still, the Auto component industry is heavily dependent upon the domestic
automobile industry. According to Society of Indian Automobile Manufacturers (SIAM),
the annual production of Indian automotive industry touched 8.46 million vehicles in
2004-05. Two wheelers accounted for 77 percent of the production followed by passenger
vehicles comprising cars and utility vehicles (14.5%), commercial vehicles (4%) and
three wheelers (4.5%). The organized sector of the industry is fragmented.

According to ACMA, the number of automotive components manufacturers in India total

480 of which sales of only 38 companies fall in the US$ 50-500 million category, 220
companies fall in the US$ 5-5 million category and 222 companies fall in the US$ 1-5
million category. The unorganized sector is also very large and includes counterfeits of
reputed brands, a host of local brands and the reconditioning of old components.
Geographically, Indian automotive components manufacturers have come up in four
clusters:
✔ Bangalore/Hosur/Chennai in south India;
✔ Delhi/Gaziabad/Gurgaon/Faridabad/Lucknow in North India;
✔ Mumbai/ Nasik/Pune in Western India;
✔ Uttarpara/Jamshedpur in Eastern India.
(Source: http://www.ibef.org)
The Auto Component Industry has grown from US$ 3278 Mn. in 1996-97 to about
US$10,000 in 20005-06.

Exports – Future untapped outsourcing opportunity

The upheaval in the international auto components industry has presented a window of
opportunity for the Indian Auto Component manufacturers.With the Big 3 auto
manufacturers in the USA cutting down production in the face of competition from Japan
and looking at sourcing cheaper auto components from other parts of the world in order
to improve profitability, has resulted in overcapacity in the global automotive component
industry especially in the USA. This has resulted in many component manufacturers
closing down and others moving production to cheaper locations in China, Eastern
Europe and India. General Motors and Ford have stated their intention to increase their
off take of components from Asia to US $8bn-10bn per annum (published data) by 2010
from $1.2bn currently.
In the past, India has emerged as a significant exporter of auto parts. From US$ 578
million in 2001-02, overseas sales of Indian companies have jumped to US$ 1.4 billion in
2004-05.

Typically 60% of the exports are to the replacement market and the rest 40% to the OEM
segment. In the past, Indian component manufacturers were heavily dependent on this
market for the reason that unlike the OEM market, the replacement market has low
volumes but high margins. The OEM market, on the other hand, has very large and
assured volumes, but low margins and stringent quality norms. As a result, Indian
component manufacturers targeted mainly the replacement market for exports.

AUTO COMPONENT INDUSTRY EXPORT (IN US $ MLN.)

ACMA estimates the auto component exports to reach USD 20-25 Bn by 2015 growing at
a CAGR of 33.4% Domestic Growth Potential The auto component industry is dependent
on the growth of the auto industry. As per ACMA estimates, the passenger vehicle
production in India is expected to be 2 million by 2010 and 3 million by 2015. The
projected growth rates for multi-utility vehicles and passenger cars are 6% and 11%
respectively.
DEMAND AND SUPPLY
Current trends indicate a smooth run for the auto component industry. In fact, since 2000,
this is one sector which has made a global mark and has been identified as a sunrise
industry. The industry is transforming from being highly domestic-centric, to a force
ready to face global competition.

The factors that will drive growth for the auto component industry are:
 The growth expected in the domestic automobile industry will give a fillip to the
auto component sector. The Indian automobile industry offers great potential
considering the low penetration along with rising income levels and a rapidly
growing middle class. These factors will see a boost in demand for vehicles,
especially passenger cars and two wheelers. These two segments are estimated to
grow at between 10-12% for at least the next five years.

 The entry of global OEMs, making India as their manufacturing base, has given a
big boost to the industry. For instance, Skoda plans to source parts for its
European operations from its Indian base and raise indigenisation level for Indian
models to 70%. This trend has also enabled Indian companies to gain a
competitive edge in the global market. Further, the model of cluster-based
development prominent in this sector will provide economies of scale.

 Export of automobiles has also emerged as a key component of growth. Rising

exports of Indian-made vehicles like M&M’s Scorpio model, Bajaj Auto’s Bikes,
Tata Motors’ City Rover are indirectly increasing the demand for Indian auto
components. Also, the export of India-made models of global OEMs like
Hyundai’s Santro Xing and Suzuki’s Alto has given a boost to the industry.

 De-regulation and the Government’s policy initiatives have facilitated growth and
focus has now shifted towards attracting foreign direct investments. Also, the
Government’s initiative towards road development will give a boost to demand
for vehicles and indirectly auto components.

 The Government’s initiatives towards opening up channels of finance.

 Investments coming in for research and development will keep the industry
abreast of the latest technology.

Entry of global OEMs has transformed the Indian automobile and auto components
landscape. India is being perceived as a major market for cars and two wheelers by global
OEMs. Before the end of 2006, at least 30 new car models are expected to be launched
by foreign OEMs.
SEGMENTAL ANALYSIS

Market share statistics is shown following

GROWTH DRIVERS
The Auto component sector is emerging as the next big business opportunity for Indian
companies as global original equipment manufacturers (OEMs) hike procurement plans
and domestic companies expand. India has gradually become a sourcing hub for auto
companies worldwide. Among the companies outsourcing from India are General Motors,
Ford, Daimler Chrysler, Hyundai, Fiat, Toyota, Delphi, Navistar, Visteon, Cummins and
Caterpillar.
(Source: http://acmainfo.com)
The three main drivers to the growth of Indian automotive components industry are
✔ Growth of domestic automobile market
✔ the entry of foreign vehicle manufacturers and
✔ growing cost pressures in the global automotive industry.

The biggest threat to Indian auto components industry is from China. However, the two
countries have unique strengths enabling them to find their own niche in the world
market. India has an edge in engineering-driven supply of automotive components
industry while China holds an edge in cost-driven components supply.

Export Competitiveness
International automotive players with operations in India are increasingly sourcing
components from Indian automotive component manufacturers. The demonstrated ability
of Indian component makers to make supplies to global automotive manufacturers in the
country opens up the possibility of the component makers supplying the same OEMs in
other countries as well. Indian component manufacturers continue to enjoy competitive
advantages primarily on the strength of the following factors:

 Low labour costs: it pulls down the total cost of production, typically in
assembled parts such as clutches and lighting equipment.

 Less stringent environmental regulations: environmental regulations have

rendered the production of parts like castings cost prohibitive in developed
countries.

 Low minimum economic scales and possession of established technology.

The parts exported by Indian automotive component manufacturers are targeted at

following distinct groups of buyers:

1. To international vehicle majors: exports are made largely to their operations in

developing countries.
2. To vendors who supply to component manufacturers
3. To the replacement market: which accounts for a large proportion of the exports of
components from the Indian market.
At present India's share in the global market is minuscule because even though the Indian
automotive components industry is quality-consistent, the export competitiveness of the
industry leaves scope for improvement. The automotive components industry is expected
to witness an increase in competition and quality pressures in the near future.

According to a Auto Component Manufacturers Association (ACMA)-McKinsey study,

India can achieve a 3-4 per cent share of the potential sourcing market (estimated by
them at US$ 700 billion) by 2015 given India's strengths, especially its competitiveness
in manufacturing labour intensive, skill-intensive parts and parts in evolving technology
aggregates among others.

The domestic Auto component market try has a strong correlation with the GDP growth.
The GDP has been growing at approximately 7% over the last three years and is expected
to touch 8% growth in the coming years. This augurs well for the auto industry, which in
turn should boost the Indian auto component industry. India has a strong competitive
advantage to become a preferred base for outsourcing as compared to countries like
China and the Philippines. India’s strength lies in the following:

Highly skilled and educated workforce and primarily English-speaking engineers and
managers

Low cost skilled labour: A skilled person in Europe can earn as much as $29 per hour
while skilled labour in India earn as low as euro 5 per day

With High Machine Tool Capability, improving tooling capability, extremely capable
component industry and most raw material being locally produced, India provides the
opportunity of being an excellent manufacturing base. Together with its high quality,
reasonable pricing and special capability in Supplying Smaller Volumes, India is an
excellent source for supplying auto components.

INDUSTRY DYNAMICS
The major challenges that the auto industry is presently facing is with respect to its
capability to innovate and upgrade in order to remain competitive (both qualitatively and
price wise) in the international market.
ENTRY BARRIERS
Following are some of the reasons which act as entry barrier to the automobile industry:
 High level of accuracy while manufacturing auto parts
 Knowledge of latest technology
 Heavy investment in the research and development
RISK AND CONSTRAINTS
Though India rides on its inherent strengths, a few risks exist that the auto component
manufacturers may have to confront.

A global slowdown can derail the prospects of the industry.

Volatility in the prices of metals and other inputs could erode the industry’s cost
competitiveness. Further, global OEMs expect a commitment of 5-10% reduction
in prices every year.
Tier I manufacturers taking up greenfield projects overseas.
Intense competition from counterparts in other emerging economies may add pressure
on margins of manufacturers.
Product substitutes due to fast-changing technology

Addressing these challenges and risks will be crucial to promoting SMEs in the auto
component industry. The government has initiated cluster-based development –
geographical concentration of enterprises having similar lines of business – which gives
rise to external economies and favours emergence of specialised technical, administrative
and financial services. This form of networking of small firms is a means of achieving
economies of scale. Extending this intitiative further, the government is encouraging
banks to adopt a cluster-based lending approach to ease availability of funds to SMEs.

Auto Component Clusters in India

State No.

Andhra Pradesh 1

Delhi 1

Gujarat 5

Haryana 3

Jharkhand 1

Karnataka 2

Maharashtra 5

Madhya Pradesh 1

Punjab 4

Tamil Nadu 1
The Indian auto component industry is poised for robust growth till 2010. There is a
perceptive exuberance in the industry and growth estimates indicate a booming industry.
Going by current trends in production and exports of auto components, indicate a
doubling of the domestic auto component industry by 2010. The production of auto
components could grow to US$22 bn by 2010. Similarly, India’s exports of auto
components could grow to US$4.5 bn as compared to US$1.8 bn in 2005. Expected
growth in production and exports of auto components is shown in the graphs below.
INVESTMENT REQUIREMENT
Since 2000, the auto component industry has recorded an investment level of Rs 18 bn
and has attracted US$ 530 mn in terms of foreign direct investment. Investments in the
sector have been growing at 14% per year. In 2005-06, investments touched US$ 4.4 bn,
and are expected to grow significantly in future.

Source:ACMA

The Investment Commission has set a target of attracting foreign investment worth US$ 5
bn for the next five years to increase India’s share in the global auto components market
from the present 0.4% to 3-4%. This is a sizeable target considering the meagre amount
of FDI currently coming into the industry. The changing perception of global auto makers
is however fast altering this scenario.

With less than 1% share in the global market, India has tremendous potential to emerge as
a supply base. Several global giants like Ford and Toyota have already set up base in
India to source auto components. Outsourcing is fast catching up with domestic OEMs as
well, with most Indian OEMs today sourcing nearly 70-80% of their component
requirements from vendors.

This changing business scenario is leading to an inevitable outcome of consolidation

within the industry. The takeover of Kar Mobiles by Rane Engine and of Gero Auto by
Uma Precision are few instances. However, such mergers and takeovers will be few and
far in between in the auto component industry, unlike the churn out anticipated in other
emerging industries – the principal factor being the vastness of the market and the range
of products that need to be delivered.
Rather than domestic consolidation, the general trend at present is for the large auto
component manufacturers to establish a global presence. Top auto component
manufacturers have already set up base in the global markets, especially in Europe.
Overall, there have already been 16 acquisitions, with six made in 2005. The industry is
the third highest among the Indian industries after IT and Pharma, in acquiring overseas
assets. These acquisitions have largely been in Europe and the USA. This trend has been
possible as the auto ancillary industry in these countries have been collapsing, thus
making it affordable to acquire these companies. Nevertheless, this will provide a base
for Indian companies to access the European and American markets.

Indian auto component companies are also setting up bases in other emerging economies,
who are potential competitors, for instance, Sundaram Fasteners’ greenfield facility in
Zhejiang and Bharat Forge’s joint venture with the Chinese automotive major FAW
Corporation. Another auto component manufacturer with plans to enter China is PMP
Components, which intends to set up a sourcing base to establish itself as a low cost
supplier.

These trends are indicative of the changing business environment in the country. Top auto
component manufacturers are gearing to take big risks. Their cross-border vision has
established them as global companies. Though the going-global phenomenon is limited to
a handful of companies, the smaller companies are also indirectly gearing to this trend by
entering into formal manufacturing contracts and specialization.
GOVERNMENT POLICY
The auto component industry, comprising of around 500 firms in the organized sector and
more than 10,000 firms in the small and unorganized sector has been one of the fastest
growing segments of Indian manufacturing. It has the capability to manufacture the entire
range of auto parts and has rapidly added to its capacity base.

The initiatives taken by the Government in 2006-07 to give a boost to the automobile
sector include: a) reduction in the duty of raw material to 5-7.5 per cent from the earlier
10 per cent, b) setting up of the National Automotive Testing and R&D Infrastructure
Project (NATRIP) at a total cost of Rs.1,718 crore for enabling the industry to usher in
global standards of vehicular safety, emission and performance standards, and (c)
finalization of the Automotive Mission Plan (AMP) 2006- 2016 for making India a
preferred destination for design and manufacture of automobile and automotive
components.
KEY INDIAN PLAYERS
The major players of the Auto components industry in India (within the brackets their
product range) are:

Autolec (oil pumps)

Automotive Axles (axles)
Bharat Gears (gears)
Clutch Auto (clutch)
Gabriel India (shock absorbers)
IP Rings (piston rings)
Kalyani Brakes (brake assemblies)
Lumax Industries (rear view mirrors)
Mico (fuel pumps)
Sundaram Brake Linings (brake linings)
Sundaram Clayton (air brake assembly)
Sundaram Fasteners (fastners)
Swaraj Engines (engines)
Ucal Fuel (carburetors)
Wheels India (wheel rims) etc.

Bharat Forge's product portfolio includes steel-forgings, machine crankshafts and fronts.

Kalyani Brakes deals with air and hydraulic brake systems, Motherson Sumi with
moulded components and door panels and Automotive Axle with axle and brake
assemblies.

(Source: Society of Indian Automobile Manufacturers and Ministry of Road Transport)

FUTURE OUTLOOK

These factors portend a robust auto ancillary industry in India and the overall expected
good growth will provide several opportunities for the emergence of new enterprises.
Extending their reach to global markets is the pre-dominant outlook among the top auto
component manufacturers in the country. The vision to compete globally comes from the
inherent strengths the Indian auto component industry possesses. Some features are:

 Cost reduction of 25-30% in production in the domestic market compared to

overseas
 Low labour costs
 Designing, engineering and technical skills
 Established quality systems
 Availability of raw materials
 Adaptability to new technology
 Investments in research and development, coming in from global OEMs. This
stands out positively in favour of India. Key players are not only willing to
invest in R&D but also in mechanical and engineering operations. These
investments are expected to increase in the near future.

The Indian auto component industry is poised for robust growth till 2010. There is a
perceptive exuberance in the industry and growth estimates indicate a booming industry.
Going by current trends in production and exports of auto components, indicate a
doubling of the domestic auto component industry by 2010. The production of auto
components could grow to US$22 bn by 2010. Similarly, India’s exports of auto
components could grow to US$4.5 bn as compared to US$1.8 bn in 2005. Expected
growth in production and exports of auto components is shown in the graphs below.
The overall trend is encouraging, but remaining competitive in this changing scenario
will be the toughest challenge. The combination of low manufacturing costs along with
quality systems would give an edge to companies in terms of pricing and quality.
Expansion and diversification will help break into new markets. It would be imperative
for these companies, which are largely based on traditional management practices, to
imbibe technology in a big way.
RECOMMENDATIONS
Looking forward, the industry displays tremendous potential in generating employment
and boosting entrepreneurship in the country. The spate of new investment plans
announced by global and domestic automobile manufacturers promises the emergence of
India as a global hub for auto components.

The industry is transforming, and the boost in demand will see the emergence of several
new players in the industry. The vast market for auto components, and the diverse
products and technology involved ensures a place and role for many. At the same time,
the entry of several global automobile manufacturers will bring in more regulation into
the industry and see a pruning of the spurious market. Among the smaller players in the
unorganized segment, this implies moving away from being standalone companies, to
entering into either contract manufacturing or being ancillary units. The newly defined
rules are specialization, development and delivery that hold the key to success in the auto
component industry.
LIST OF COMPANIES
Following companies are sorted from large databases on the basis of following
parameter: turnover, networth and profitability. Based on the industry analysis of the auto
ancillary industry and financial analysis of the players present in the industry, following
are the shortlisted companies.

COMPANY TURNOVER (INR IN CRORES)

Alfa Laval 1,478
Atlas Copco 72,069
Automotive Stampings 13,484
Bajaj Auto 737
Bharat Forge 3,976
Century Inka 13,359
Cosmo Films 4,082
Cummins India 7,408
Deepak Fertilizers Ltd. 5,017
Finolex Cables 5,142
Finolex Industries 19,170
Force Motors 6,917
Idea Cellular 891
Kalyani Steels 1,348
KBL 2,204
KOEL 1,351
KPIT Cummins 9,692
Newage Electricals 2,193
SKF Bearings 2,030
Spicer India 3,325
Sudarshan Chemicals 2,400
Suzlon Energy 1,436
TATA Autocomp 19,110
TATA Toyo 1,436
Tech Mahindra 4,565
Thyssen Krup 6,545
Venky’s 3,016
 ANALYSIS

OF

THE

TEXTILE INDUSTRY

86
INDIAN TEXTILE INDUSTRY OVERVIEW
The Indian textile industry is one the largest and oldest sectors in the country and among
the most important in the economy in terms of output, investment and employment. The
sector employs nearly 35 million people and after agriculture, is the second-highest
employer in the country. Its importance is underlined by the fact that it accounts for
around 4% of Gross Domestic Product, 14% of industrial production, 9% of excise
collections, 18% of employment in the industrial sector, and 16% of the country’s total
exports earnings. With direct linkages to the rural economy and the agriculture sector, it
has been estimated that one of every six households in the country depends on this sector,
either directly or indirectly, for its livelihood.

A strong raw material production base, a vast pool of skilled and unskilled personnel,
cheap labour, good export potential and low import content are some of the salient
features of the Indian textile industry. This is a traditional, robust, well-established
industry, enjoying considerable demand in the domestic as well as global markets.

Cotton textiles continue to form the predominant base of the Indian textile industry,
though other types of fabric have gained share in recent years. In 1995-96, the share of
cotton and manmade fabric was 60% and 27% respectively. More recently, cotton fabrics
accounted for 46% of the total fabric produced in 2005-06, while man-made fibres held a
share of 41%. This represents a clear shift in consumer preferences towards man-made
fabric.

The phasing out of the international quota system is a major turning point for the Indian
textile industry – an opportunity and a threat. The textile industry is among the SME
intensive sectors in India, largely an outcome of government policies during the early
years of Independence. Focusing on promoting domestic employment, large-scale
production in the textile industry was curtailed through restrictions on total capacity and
level of mechanisation. Several textile items were reserved for the small scale segment.
These policies promoted the extensive growth of small scale textile enterprises that were
highly labour intensive, though it eroded the competitiveness of the industry and acted as
a disincentive for capital investment.

These policies -- pursued from the 1950s to the 1970s -- resulted in the dominance of the
decentralised powerloom and handloom sectors in the textile industry, which are mainly
small and medium scale enterprises. In fact, many of the large textile companies are also
conglomerates of medium sized mills. Statistics released by the Ministry of Textiles
shows a highly fragmented industry, except in the spinning sub-segment. The organised
sector contributes over 95% of spinning, but hardly 5% of weaving fabric. Small Scale
Industries (SSIs) perform the bulk of the weaving and processing operations.
In the post-quota regime, the Indian textile industry is poised to become a major player in
the US $395 billion global textile and clothing market. With the global retailing industry
exploring opportunities for outsourcing, Indian exports are expected to surge from the
current levels of $14 billion to $50 billion by 2010. ICFDC.com presents an analysis of
the sector, the key drivers and the opportunities for Indian players.
India is fast emerging as a key player in the $395 billion global textiles and clothing
market. Clothing accounts for roughly 60 per cent of the market while textiles constitute
the balance 40 per cent. The dismantling of the quota regime has brought the entire
market at an interesting stage with players like China and India beginning to make their
presence felt. On 1 Jaunary 2005, the WTO Agreement on Textiles and Clothing (ATC)
came into operation replacing the earlier Multi-Fibre Agreement (MFA). The phasing out
of the MFA is expected to trigger exponential growth for global textile trade.

Currently the US imports nearly 85 per cent of its clothing needs while the EU imports
60-70 per cent. In 2004, the US imported $76 billion of textiles from across the world.
China at $18.2 billion was the front runner in meeting this demand with a 24 per cent
share of the market, a little less than the total share of Mexico, India, Canada and
Indonesia. In the first quarter of 2005, India's textile exports to the US has risen by an
estimated 22 percent. A key driver of global textile trade is low cost sourcing of textiles
and clothing. Global retailing industry is exploring opportunities for outsourcing to deal
with pricing pressures. As a result outsourcing budgets of retail giants like Wal-Mart, JC
Penny, Tommy Hilfiger, Marks and Spencer, K-Mart and Tesco are on the rise. China is
expected to get a bulk of the advantage due to its economies of scale and superior
infrastructure. India too will be a major beneficiary, thanks largely to its low cost labour,
its skilled manpower and the fact that it is a low cost sourcing base for cotton. What's
more, the anti-surge initiatives launched against Chinese exports will benefit the Indian
industry and experts believe that India could emerge as the second largest textile
outsourcing hub. Indian exports are estimated to grow from the current levels of $14
billion to $50 billion by 2010. And its share of the global textile trade is expected to
double from 3.5 per cent currently over the next five years.

Textile Sector in the Post-MFA Regime

2004 2010 (estimated)

Global Textile Trade $395 billion $600 billion

China's Exports $97 billion $220 billion

India's exports $14 billion $50 billion

The key advantages of the Indian industry are:

 India is the third largest producer of cotton with the largest area under cotton
cultivation in the world. It has an edge in low cost cotton sourcing compared to
other countries.
 Average wage rates in India are 50-60 percent lower than that in developed
countries, thus enabling India to benefit from global outsourcing trends in labour
intensive businesses such as garments and home textiles.
  Design and fashion capabilities are key strengths that will enable Indian players to
strengthen their relationships with global retailers and score over their Chinese
competitors.
 Production facilities are available across the textile value chain, from spinning to
garments manufacturing. The industry is investing in technology and increasing
its capacities which should prove a major asset in the years to come. Large Indian
players such as Arvind Mills, Welspun India, Alok Industries and Raymond's have
established themselves as 'quality producers' in the global market. This
recognition would further enable India to leverage its position among global
retailers.
 India has gathered experience in terms of working with global brands and this
should benefit Indian vendors.

India vis-à-vis Global Textiles

In the global scenario, India is the third largest producer of cotton after the US and China,
accounting for 25% of the world trade in cotton yarn. India accounts for 24% of the
world installed capacity of spindles and it is one of the biggest exporters of yarns in the
global market.

The global textile and clothing industry is estimated to be worth about US$ 4,395 bn and
currently global trade in textiles and clothing stands at around US$ 360 bn. The US
market is the largest, estimated to be growing at 5% per year, and in combination with the
EU nations, accounts for 64% of clothing consumption.

The Indian textile industry is valued at US$ 36 bn with exports totalling US$ 17 bn in
2005-2006. The Indian textile industry has grown by 19% in 2005-06 and is expected to
grow at 20% while its export is likely to grow at 25% in the next few years. In 2005-06,
India’s share was 4.72% of global textile and clothing exports. The export basket includes
a wide range of items including cotton yarn and fabrics, man-made yarn and fabrics, wool
and silk fabrics, made-ups and a variety of garments. Quota constraints and shortcomings
in producing value-added fabrics and garments and the absence of contemporary design
facilities are some of the challenges that have impacted textile exports from India.

India’s presence in the international market is significant in the areas of fabrics and yarn.

 India is the largest exporter of yarn in the international market and has a share of
25% in world cotton yarn exports
 India accounts for 12% of the world’s production of textile fibres and yarn
 In terms of spindleage, the Indian textile industry is ranked second, after China,
and accounts for 23% of the world’s spindle capacity
 Around 6% of global rotor capacity is in India
 The country has the highest loom capacity, including handlooms, with a share of
61% in world loomage.

INDUSTRY STRUCTURE : INDIAN & GLOBAL

The industry structure is fully vertically integrated across the value chain, extending from
fibre to fabric to garments. At the same time, it is a highly fragmented sector, and
comprises small-scale, non-integrated spinning, weaving, finishing, and apparel-making
enterprises. The unorganised sector forms the bulk of the industry, comprising
handlooms, powerlooms, hosiery and knitting, and also readymade garments, khadi and
carpet manufacturing units. The organised mill sector consists of spinning mills involved
only in spinning activities and composite mills where spinning, weaving and processing
activities are carried out under a single roof.

Buyer-Driven Network

The global textile industry, a buyer-driven network, is dominated by retailers, marketers

and manufacturers. In the newly defined business environment for textiles, retailers like
Zara, H&M, etc. have redefined the life of fashion trends from the earlier five to six
months to around two months. In this scenario of such short shelf-life, the small scale
operations of Indian SME apparel manufacturers gives them the flexibility to service
custom-made orders at low cost. It is likely that India will become a preferred destination
for global manufacturers and retailers as well, and big opportunities for SMEs are
forthcoming.

Today, apart from the big Indian textile manufacturers like Gokuldas Exports, Alok
Industries, Raymonds, Welspun India, Arvind Mills and Madura Garments, several small
and medium sized apparel manufacturers have also become significant contributors to the
total apparel exports of the country. Cotton knitwear suppliers of Tirupur, hosiery
suppliers of Ludhiana and suppliers of home textiles from Tamil Nadu, Kerala and
Punjab, among others, have been accepted as high quality and cost effective apparel
suppliers in international markets.
Indian textile industry functions in the form of clusters across the country. India has about
70 textile clusters producing 80% of the country’s total textile production. Some of these
clusters are very huge like

 Panipat, accounting for 75% of the total blankets produced in the country
 Tirupur, responsible for 80% of the country’s hosiery exports
 Ludhiana, which accounts for 95% of the country’s woollen knitwear produced.

Some key benefits of a cluster based approach are:

 Networking among enterprises
 Economies of scale
 Improved bargaining power
 Technology and skill upgradation
 Global visibility and being part of the value chain
 Easier access to finance
 Greater institutional support.
MARKET FOR TEXTILE PRODUCTS
As in January 2006, there were 1779 cotton/man-made fibre textile mills in the organised
sector, with an installed capacity of 34.1 million spindles and 395,000 rotors. Of these,
218 were composite mills which accounted for just 3% of total fabric production, with
97% of fabric production happening in the unorganised segment. Cloth production in the
mill sector has fallen from 1,714 million sq mtrs in 1999-2000 to a projected 1,493
million sq mtrs in 2005-06, declining at a rate of 2% per annum. As a result, the number
of sick units in the organised segment has also been growing rapidly.

The competitiveness of composite mills has declined in comparison to the powerlooms in

the decentralised segment. Policy restrictions relating to labour laws and the fiscal
advantages enjoyed by the handloom and powerloom sectors have been identified as two
of the major constraints responsible for the declining scenario of the mill sector.

Nonetheless, overall cloth production in the country has been growing at 3.5% per annum
since 2000, with growth driven largely by the powerloom sector. Being the largest
manufacturer of fabric in the country, the powerloom sector produces a wide variety of
cloth, both grey as well as processed. According to the Ministry of Textiles, there are
1.923 mn powerlooms in the country distributed over 430,000 units. The sector accounts
for 63% of the total cloth production in the country and provides employment to 4.815
mn people.

The handloom sector is the second-highest employer in the country after agriculture. The
sector accounts for 13% of the total cloth produced in the country, not including wool,
silk and handspun yarn. The production of handloom fabrics had gone up to 4629 mn sq
mtrs in 2005, from 500 mn sq mtrs in the 1950s, representing an annual growth of around
4%. The sector is weighed down by several problems such as obsolete
technology,unorganised production systems, low The Man-made textile industry
comprises fibre and filament yarn manufacturing units of cellulosic and non-cellulosic
origin. The cellulosic fibre/yarn industry is under the administrative control of the
Ministry of Textiles, while the non-cellulosic industry is under the administrative control
of the Ministry of Chemicals and Fertilisers. XV productivity, weak marketing links,
overall stagnation in demand and competition from the powerloom and mill sectors.

Knitting and hosiery units account for around 17% of fabric production in the country.
According to data available for the year 2000, India had about 6,000 knitting units
registered as producers or exporters and most of these units were registered as small-scale
units.

Trade Scenario
According to the provisional DGCI&S data, textile exports during fiscal 2005- 06 stood
at around US$17 billion, recording a 22% growth year-on-year. Except for man-made
textiles, all segments in the textile industry, including handicraft carpets, wool and silk,
have recorded a growth in exports during 2005-06 -- the first year since the phasing out
of the quota system in the global market.
Readymade garments (RMG) is the largest export segment, accounting for a considerable
45% of total textile exports. This segment has benefited significantly with the termination
of the Multi-Fibre Arrangement (MFA) in Jan 05. In 2005-06, total RMG exports grew by
29%, touching US$ 7.75 bn. In 2003-04 and 2004-05, the growth in RMG exports was
8.5% and 4.1% respectively. The jump in 2005-06 exports has been largely due to the
elimination of quotas.

Exports of cotton textiles -- which include yarn, fabric and made-ups -- constitute over
2/3rd of total textiles exports (excluding readymade garments). Overall, this segment
accounts for 26% of total textile exports. According to the Ministry of Textiles, in 2005-
06, total cotton textile exports Source: Ministry of Textiles, GoI Source: Ministry of
Textiles, GoI XVI were worth US$ 4.5 bn, implying a growth of 27% over the exports in
2004-05, which were worth US$ 3.5 bn.

Man-made textiles exports have witnessed a decline of 2.5% in 2005-06. Between 1999-
2000 and 2002-03, man-made textiles exports were growing at around 30% per annum.
The slowdown began since 2003-04 and has been on the decline since.

Major export destinations for India’s textile and apparel products are the US and EU,
which together accounted for over 75% of demand. Exports to the US have further
increased since 2005, post the termination of the MFA. Analysis of trade figures by the
US Census Bureau shows that post-MFA, imports from India into the US have been
nearly 27% higher than in the corresponding period in 2004-05.
DEMAND AND SUPPLY

The following graph shows the trend of demand in various segments of textile industry
(the information available is only upto 2002 but the demand since then is increasing,
especially in man- made fibers section)

Source: www.emeraldinsight.com

Supply, in textile segment is always more than the demand for it. The reason behind this
mismatch in demand and supply is the low entry barriers for the industry and no expiry
date of the products.
SEGMENTAL ANALYSIS

Textile industry can be broadly divided into 3 segments viz.

✔ Spinning (conversion of Cotton/ Fibre to Yarn)
✔ Weaving (Yarn to Fabric)
✔ Garment manufacturing (Fabric to Garments).

Trends in Production
Yarn and fabric production has been growing annually at 1.9% and 2.7% respectively,
since 2000. Yarn production has increased from 3,940 mn kg in 1999- 00 to 4,326 mn kg
in 2004-05. Man-made yarn has driven much of this, showing a robust growth of 4.3% in
the last five years. Spun yarn production and the cotton yarn sector have also grown,
albeit less impressively, recording growths of 2.4% and 0.6% respectively.

Source: www.fashion2fibre.com
Fabric production has been growing at 2.7% annually between 2000 and 2005, driven
primarily by the smallscale, independent powerloom sector. Growth in the 100% non-
cotton segment touched 5%, followed by cotton fabric at 1.5% and blended fabric at
0.3%. Fabric production touched a peak 45,378 million sq mtrs in 2004-05, and in Nov
06, production recorded a robust 9% growth compared to the corresponding period in the
previous year.

Source: www.fashion2fibre.com
 Segment-wise Exports, 2002-2006 (US$ bn)

Category 2002-03 2003-04 2004-05 2005-06

Cotton Textiles 3.62 3.68 3.54 4.49

Man made Textiles

1.53 1.86 2.05 2

Silk 0.49 0.56 0.59 0.69

Wool 0.29 0.35 0.42 0.47

Ready Made Garments 5.75 5.92 6.02 7.75

Handicrafts 1.42 1.11 1.01 1.24

Jute 0.2 0.25 0.28 0.29

Coir & Coir Manufactures 0.08 0.08 0.11 0.13

Source: www.fashion2fibre.com
INDUSTRY DYNAMICS
In textile industry, manufacturers require more than production efficiencies to survive in
the years ahead. They need professionalism to undertake hard -core marketing, focused
and consistent positioning, and most of all a keen understanding of fashions and trends to
cash in on advantage of competing in a world without quotas.

Above all, a change in mindset backed by consistent efforts in the rough and tough
environment of quota-less competition, will be required to attain a standing in the world
of garments market. Without them the global buyers will wait and watch just long enough
before moving over to more suitable supply centers.
GROWTH DRIVERS
Drivers of exports
 Rising outsourcing budgets of retail giants
 Indian companies evolving from mere converters to vendor partners of global
buyers
 Large outsourcing orders is helping Indian companies build capacities, lower per
unit cost and become competitive
 Imposition of caps on certain import segments from China by EU and US given
the surge in Chinese exports has opened up opportunities for India
 Skilled manpower to handle orders with complex designs.

Drivers of domestic market

 Growing young population
 Rising household income levels
 Growth of organised retail

Several government initiatives targeted to attract investments

 Technology Upgradation Fund Scheme
 Scheme launched in 1999 to provide firms access low interest loans for
technology upgradation and setting up new Units with state-of-art technology
 Scheme has disbursed INR 91.61 bn till 31st December 2005

Policy related to foreign investment

 Upto 100% foreign direct investment allowed in textile and apparel
manufacturing industry, with approval of the Foreign Investment Promotion
Board
 Companies free to set up fully-owned sourcing (liaison) offices, as well as
marketing operations

Upgrading infrastructure
 “Scheme for Integrated Textile Parks”, based on public-Pvt partnership model to
build world class infrastructure facilities
 Technology Mission on Cotton (TMC), focusing on Cotton R&D, dissemination
of technology to farmers, improvement of market infrastructure and
modernisation of ginning and pressing sector

Positive developments in the Textile Policy

 Reservation for small scale sector, especially key segments removed over last few
years
 Fiscal anomalies in terms of excise duty structure removed

Product development and design capabilities

 Several institutes in India for textile development, the major one being National
Institute of Fashion Technology (NIFT)
 Several leading colleges also offer courses in Textile Engineering
Business opportunities for foreign players in Indian textile industry
 Top 10 buyers in India (Carrefour and Synergies India, Federated, Fifth Avenue,
Gap, H&M, JC Penny, Li & Fung, The Children’s Place, Wal-Mart) account for
35% of total textiles sourced from India. Other major companies include El Corte,
Ecko, Kellwood, VF Corporation, Tesco, Next, Karstadt-Quelle
 Partner with Indian vendors to import from India, by nominating large Indian
companies having credibility in terms of capacities and quality
 With Indian consumers increasingly getting exposure to international fashion
trends, potential exists for export of lifestyle brands of garments and accessories
to India

Brand licensing/ franchising

 Brand licensing - Hugo Boss, Tommy Hilfiger, Mango, Lovable, Nike, Lacoste
 Master franchisee - Marks & Spencer, Crocodile

Growth Segments for Indian Players

The domestic market is expected to boom with demand for high value branded items and
household items showing a sharp increase. Not surprisingly, yarn manufacturers are
shifting away from exports and focusing on domestic markets. The industry is ready to
utilise high quality yarn in the domestic market, which was earlier meant exclusively for
exports.

The global home textiles market, estimated at US $ 70 billion offers tremendous

opportunities for Indian players. The US and EU imports nearly $30 billion worth of
home textiles. The US market is growing at 5 per cent per year while the EU market is
growing at an estimated rate of 9-10 per cent. Japan, Australia, New Zealand are also
large consumers of home textiles. McKinsey estimates that the global trade in home
textiles will grow from $8.6 billion to $23 billion in 2010. India's presence in the US
home textile market is growing. India is the largest supplier of terry towels, bed linen and
second largest vendor of cotton made-ups to the US markets. China, Pakistan,
Bangladesh and Vietnam are major competitors for India in this segment. In the post-
quota regime, India's share of US imports has grown (between January and August 2004)
for sheets (20%) terry towels (21%), pillowcases (19%) and total made-ups (11%).

While China is slated to be the biggest beneficiary in terms of market share in US apparel
imports, India and Pakistan are expected to benefit substantially as well. China's share in
total US apparel imports is 16 per cent compared to India's 3.5 per cent. In cotton apparel
imports, China's share is 10 per cent while India's is 5 per cent, in wool apparel, the
shares are 9 per cent for Chinese products and 6 per cent for Indian. In man-made fibre
apparel, China's share is 15 per cent compared to India's 2 per cent.

Another segment in which India is a strong player is the embroidery market. The Indian
market for embroidery is valued at Rs 7.5 billion and is growing at 18 per cent per year.
This is a highly fragmented market with the organised sector constituting 40 per cent of
the industry. Demand for embroidery is on the rise and export to countries like the US,
UK, Africa, Middle East offers a huge market for embroidery products.
ENTRY BARRIERS
There exists no such entry barrier for the new entrant in any segment of the textile
industry. Reasons for the low entry barriers are:
 Heavy investment is not required to enter the industry.
 Flexible quality standards.
 No expiry date for the products.
 Skilled, cheap and seasonal labour.

Due to almost no entry barriers, competition in this industry is always increasing with
new players coming into the picture. Hence, the industry is very dynamic and position of
players in the market is not very static.
RISKS AND CONSTRAINTS
Challenges for Indian Companies

While Indian exports to the US have risen 22 per cent in the first quarter of 2005, profits
are sliding as prices have dropped 8-20 per cent and the industry is on the verge of a
shakeout. With importers preferring suppliers that have 'vertical' production systems
rather than dispersed production facilities, Indian exporters need to shore up their mass
production techniques. Of the 1,500 Indian exporters only 15 have turnovers of $50
million-plus. Infrastructure development is the need of the hour. Power and water
contribute to nearly 37 per cent of total production costs. In contrast, in China, this cost
comprises just 24 per cent. India also has to deal with inefficient port handling facilities.

Labour laws also comprise a stumbling block in the growth of Indian textile companies.
Political considerations have prevented successive governments from instituting an exit
policy. As a result, manufacturers cannot employ short duration labour as they cannot lay
them off when the global trade cycle turns. Low labour productivity is also another
constraint.

On the technology front, the Technology Upgradation Fund Scheme has been instituted
by the government in an effort to encourage manufacturers to go in for enhanced
technology. The grant during the current fiscal has been enhanced to nearly two-and-a-
half times the amount that was granted the year before. But this does not get utilised in
the appropriate manner as the technology imported is obsolete and virtually no new
technology is developed indigenously.

While China is clearly the leading exporter in the world of textiles and clothing, China
and India are not direct competitors. While China mainly uses man-made fibre and serves
mass markets, India essentially produces natural fibre and caters to niche markets. India
is now the No. 1 producer of man-made fibre, thanks to Reliance Industries, but is only
No. 3 in cotton. A garment-driven and export-led strategy is expected to help the Indian
industry to grow to a $85 billion industry by 2010, according to a CRISIL report. The
focus should be on moving up the value chain instead of exporting intermediate stage
products, say industry analysts. The investments needed to make the Indian industry a
dominant player in the global textile market is estimated to range between $15 and $30
billion. Increase in foreign direct investment will benefit the industry but this is largely
dependent on the reforms process.
INVESTMENT REQUIREMENTS

Textile industry requires an investment of Rs1,40,000 crore to become US$85 billion in

size by 2010. For 2005-06, the industry witnessed an investment of Rs15,000 crore and
for the fiscal 2006-07, the investment is expected to double to Rs30,000 crore. The
weaving segment has already witnessed high investment in 2005-06.

Investments in the textiles sector can be assessed on the basis of three factors:

 Plan schemes such as the Technology upgradation Funds Scheme (TUFS),

Technology Mission on Cotton, Apparel Parks, etc. -- Under the TUFS scheme, a
total of Rs 916 bn has been disbursed for technology upgradation. There are around
26 Apparel Parks in eight states in India, with a total estimated investment of Rs
134 bn
 Industrial Entrepreneurship Memorandums implemented from 1992 to Aug 06,
amounting to Rs 263 bn
 Foreign Direct Investments inflows worth US$ 910 mn have been received by the
textile industry between Aug 91 and May 06, which account for 1.29% of total FDI
inflows in the country.

Though significant investments are being made in the textiles segment, the bulk of them
are in the spinning and weaving segments. A cumulative total of US$ 6.67 bn in
investment is expected by 2008. Of this, more than two-thirds is expected in the spinning
and weaving segments, while only 25% is expected in processing and garment units.
Source: www.fashion2fibre.com

The government has been very supportive, with textile ministry organizing various road
shows around the world to attract FDI in the sector. It has also plans to extend Textile
Upgradation Fund Scheme beyond 2007; it has approved to provide an additional Rs1000
crore during the current fiscal, as the already-allotted Rs535 crore was exhausted in first
quarter of the fiscal 2006-07.
GOVERNMENT POLICIES
Recognizing the immense potential of the textile industry to spur economic growth and
drive exports, the Indian government has taken initiatives to encourage investment and
enhance global competitiveness of the sector. In the recent Budget reforms the textile
sector has been given some major concessions. Prominently, the government has
removed the disparity in excise duty structures between organized and unorganized
sector. Reduction of custom duty on textile machinery, polyester, viscose, and garment
making machinery further acted as an impetus to the industry. The excise duty on
polyester has also been reduced from 24 per cent to 16 per cent, which has brought the
duty structure in line with ASEAN countries, providing filament yarn processors with
optional excise duty of nil or 8 per cent excise duty with cenvat credit.

Government Initiatives
The Government’s role in the textile industry has become more reformist in nature.
Initially, policies were drawn to provide employment with a clear focus on promoting the
small-scale industry. The scenario changed after 1995, with policies being designed to
encourage investments in installing modern weaving machinery as well as gradually
eliminating the pro-decentralised sector policy focus. The removal of the SSI reservation
for woven apparel in 2000 and knitted apparel in 2005 were significant decisions in
promoting setting up of large-scale firms. Government schemes such as Apparel Parks for
Exports (APE) and the Textile Centres Infrastructure Development Scheme (TCIDS) now
provide incentives for establishing manufacturing units in apparel export zones.

The new Textile Policy of 2000 set the ball rolling for policy reforms in the textile sector,
dealing with removal of raw material price distortions, cluster approach for powerlooms,
pragmatic exit of idle mills, modernisation of outdated technology etc. The year 2000 was
also marked by initiatives of setting up apparel parks; 2002 and 2003 saw a gradual
reduction in excise duties for most types of fabrics while 2004 offered the CENVAT
system on an optional basis. The Union Budget of 2005-2006 announced competitive
progressive policies, whose salient features included:

 A major boost to the 1999-established Technology Upgradation Fund Scheme for

its longevity through a Rs 4.35 bn allocation with 10% capital subsidies for the
textile processing sector
 Initiation of cluster development for handloom sector
 Availability of health insurance package to 0.2 mn weavers from 0.02 mn initially
 Reduction in customs duty from 20% to 15% for fibres, yarns, intermediates,
fabrics and garments; from 20% to 10% on textile machinery and from 24% to
16% in excise duty for polyester oriented yarn/polyester yarn.
 Reduction in corporate tax rate from 35% to 30% with 10% surcharge
 Reduction in depreciation rate on plant and machinery from 25% to 15%
 Inclusion of polyster texturisers under the optimal CENVAT rate of 8%
To meet the challenges of the post-MFA setup, the Government of India initiated a
reforms process which aimed at promoting large capital investments, pruning
cumbersome procedures associated with the tax regime, etc. The Textile Vision 2010 was
born as a result of interaction between the government and the industry which envisages
around 12% annual growth in the textile industry from US$ 36 billion now to US$ 85
billion by 2010. Additionally, Vision 2010 also proposes the creation of an additional 12
million jobs through this initiative.
KEY INDIAN PLAYERS

 Welspun India is Asia's largest terry towel manufacturer and fourth largest in the
world. It supplies to leading global retailers, meeting 15 per cent of Wal-Mart's
terry towel requirements, 85 per cent of Tom Hilfiger's and 100 per cent of
Shopko's. It has plans to double its terry towelling capacity to 23830 TPA,
enhance yarn capacity by 25000 spindles and introduce bed linen with a 35
million metres capacity and has earmarked a Rs 6 billion budget for its expansion
plans.

 Alok Industries has the largest processing capacity in India and offers fully
integrated facilities for yarn texturising, weaving, knitting, processing, made-ups
and garments. It has initiated plans to expand capacities across all segments by
investing Rs 10 billion. It is focusing on home textiles and garments, which will
contribute to nearly 50 per cent of its revenues by 2007. It has already got an
impressive client list that includes brand names such as JC Penney, Tommy
Hilfiger, TARGET, Wal-Mart and international buying houses such as Britannica
Home Fashions, Elite Home Products, etc.

 Arvind Mills boasts of a wide product range in value added fabric, from fabric to
garments in denim, shirting and knits. It is a supplier to brands such as GAP,
Marks & Spencer, Levis, Tommy Hilfiger and Nike and is upgrading its garment
capacities to 14.3 million pieces per annum. Arvind Mills dominates the Indian
denim market with a 72 per cent share of the estimated 80 million metres denim
market.
FUTURE OUTLOOK

Expectations are high, prospects are bright, but capitalizing on the new emerging
opportunities will be a challenge for textile companies. Some prerequisites to be included
in the globally competing textile industry are:

 Imbibing global best practices

 Adopting rapidly changing technologies and efficient processes
 Innovation
 Networking and better supply chain management
 Ability to link up to global value chains.

The Indian textiles industry has established its supremacy in cotton based products,
especially in the readymade garments and home furnishings segment. These two
segments will be the key drivers of growth for Indian textiles. Readymade garment
exports were worth US$ 8 bn in FY06 and will cross US$ 16 bn by the end of 2010,
assuming a conservative growth of 15% per annum. According to estimates, investments
in textiles are expected to touch US$ 31 bn by 2010.

The readymade garment segment will be the principal driver of growth even in the
domestic industry. The changing preferences of Indian consumers -- from buying cloth to
readymade garments -- have prompted several companies to move up the value chain into
the finished products segment.

Strategic Initiatives
Business integration -- especially forward integration -- by the larger textile companies
has been prominent among Indian companies. Several companies that are engaged in
fabric manufacturing are now keen to enter the readymade garments space. A recent
entrant is Siyaram, which launched its readymade garments range in Nov 06, following
suit with other majors like Century Textiles and Raymond's.

Most of the large textile companies have opted for an inorganic growth strategy to scale
up operations. Acquisition is the most logical step towards integrating operations and
building the value chain. Domestic acquisitions are on the rise, while acquiring foreign
assets is yet to gain traction. Some recent domestic acquisitions that have been executed
in 2006 include KSL & Industries’ acquisition of Deccan Cooperative, and Ambattur
Clothing taking over Celebrity Fashions. Another growing phenomenon observed among
Indian textile companies is the setting up of manufacturing facilities in strategic regions
outside India, where they can avail of duty concessions and reduce export lead-time.
Zodiac and Ambattur Clothing have set up facilities in the Gulf region to cut down on
export delivery schedules to the European and US markets. Raymond's has set up a unit
in Bangladesh to avail of the zero duty access to the EU.
This trend is seen primarily among the large domestic players, who are trying to achieve
sizable scales in order to win orders from the large retailers in the US and EU. Global
retailers prefer large-sized companies that can scale up capacities consistently, keep up
with delivery schedules and meet their growing demand. They have clear preferences for
companies with integrated design, process and manufacturing facilities.

An interesting commonality in countries with successful garment exports is that they

have a much lower level of sub-contracting than India. A study during the 1990s found
that apparel firms Future Outlook XXXIII in India subcontracted 74% of their output, as
compared to only 11% in Hong Kong, 18% in China, 20% in Thailand, 28% in South
Korea and 36% in Taiwan. Consequently, these countries have a wider base of exports
and have done very well in the market for large volumes of uniform products.

Foreign Acquisitions by Indian Textile Companies

Period Acquirer Acquired Company

May 01 Arvind Mills License Of ‘Healthtex’ Kidswear Brand Of

Vf Corpn (USA)

Jun 01 Ambattur Clothing Colourplus (UK)

Sep 01 Raymonds Regency Texteis Portuguesa Limitada

(Portugal)

Sep 03 Jindal Polyester Rexor Group (France)

Dec 04 JCT Ltd CNLT Malaysia (Synegal)

May 05 Reliance Group ICI Pakistan Ltd (Pakistan)

Jun 05 Zodiac Clothing Shirting Company Located In

AlqozeIndustrial Area (Dubai)

Dec 05 GHCL Dan River (USA)

 Period Acquirer Acquired Company

May 06 Malwa Industries Emmetre Tintolavanderie Industrial (Italy)

May 06 Malwa Industries Third Dimension Apparels (Italy)

Jul 06 Welspun India CHT Holding (UK)

Jul 06 Spentex Industries Tashkent-To’yetpa Tekstil Ltd (Uzbek)

Jul 06 GHCL Rosebys (UK)

The exports market will remain favourable for India till 2008, when quota restrictions on
China end. Post 2008, competition will become tougher. This will be the phase in which
Indian textile companies will come under tremendous pricing pressures and tighter
product delivery schedules. Nevertheless, the value-added segments of readymade
garments, home furnishings and made-ups will continue to grow.

IMPLICATIONS
The fragmented industry structure has in the past been beneficial in generating
employment, but will be difficult to sustain in a globally competitive environment. For
fabric manufacturers in the unorganised segment, this will mean inefficient units losing
out eventually, while the more efficient and dynamic ones aligning with manufacturers or
buyers.For readymade garment SMEs, rising demand and preference for ready-to-wear
outfits in the domestic market will sustain a large number of units in this sector. This will
be the most thriving segment in the industry and SMEs will play a key role.

India’s key assets include a large and low-cost labour force, sizable supply of fabric,
sufficiency in raw material and spinning capacities. On the basis of these strengths, India
will become a major outsourcing hub for foreign manufacturers and retailers,with
composite mills and large integrated firms being their preferred partners. It will thus be
essential for SMEs to align with these firms, which can ensure a market for their products
and new orders.

Weaknesses of the Indian textile industry include fragmentation of the industry, lengthy
delivery times, delays in customs clearance and high transportation and input costs. To
tackle these factors, the Government will have to play a key role. Infrastructure
development, reforms in labour laws and significant policy support will be essential.
RECOMMENDATIONS

The future prospects for the Indian industry are bright, particularly in the post-quota
regime. The industry is in an expansion mode and is likely to benefit from growing
demand both in the domestic as well as global markets. Further, the anti-surge
mechanism which the WTO has imposed on Chinese exports is expected to benefit India.
Turkey is the first country to set quotas on textile and apparel imports from China. The
EU is also in the process of adopting measures to avoid surge in imports from China.
China has announced exports tarriff on textile and clothing with effect from January 2005
that will last until 2007 as measures to avoid penal duties. Even though these tarriffs are
nominal, it will increase export prices and curb demand for low priced Chinese goods in
world markets. This should enable Indian industry to offer competitive products to global
markets and increase its share in US and EU markets.
LIST OF COMPANIES
Following companies are sorted from large databases on the basis of following
parameter: turnover, networth and profitability.
Based on the analysis of the textile industry and financial analysis of various companies
in the industry, following are shortlisted companies.

COMPANY NAME TURNOVER (INR IN CRORES)

Aditya Birla NUV 2,772
Arvind mills 1,623
Arvind products 392
Ashima 450
Garden silk mill 1,080
Nova petrochem 535
Welspun India 633
Alok Inds. 1,454
Central Ind. Pol. 425
Cotton Corporation 1,012
Forbes Gokak 602
Futura Polyester 521
Mafat Fine Merg 307
NRC 445
Orkay Inds. 310
Pratibha Syntex 355
Raymond 1,341
S Kumars Nation 890
Siyaram Silk 450
Indo Rama Synth 2,102
 ANALYSIS

OF THE

FOOD PROCESSING

INDUSTRY

114
FOOD PROCESSING INDUSTRY OVERVIEW
The Food Processing Industry sector in India is one of the largest in terms of production,
consumption, export and growth prospects. The government has accorded it a high
priority, with a number of fiscal reliefs and incentives, to encourage commercialization
and value addition to agricultural produce; for minimizing pre/post harvest wastage,
generating employment and export growth.Though agriculture contributes only 1/4th of
Indian GDP, it sustains approximately 2/3rd of the population and continues to determine
the growth rate of the national economy.

Change in consumption patterns

Increasing incomes are always accompanied by a change in the food basket, which
analyses food expenditure patterns over the last three decades in India. The report
observes that the proportionate expenditure on cereals, pulses, edible oil, sugar, salt and
spices declines as households climb the expenditure classes in urban India while the
opposite happens in the case of milk and milk products, meat, egg and fish, fruits and
beverages.

For instance, the proportionate expenditure on staples (cereals, grams, pulses) declined
from 45 per cent to 44 per cent in rural India while the figure settled at 32 per cent of the
total expenditure on food in urban India.

A large part of this shift in consumption is driven by the processed food market, which
accounts for 32 per cent of the total food market. It accounts for Rs 1,280 billion (US$
29.4 billion), in a total estimated market of Rs 3,990 billion (US$ 91.66 billion). The food
processing industry is one of the largest industries in India -- it is ranked fifth in terms of
production, consumption, export and expected growth.

The Confederation of Indian Industry (CII) has estimated that the food processing sector
has the potential of attracting Rs 1,50,000 crore (US$ 33 billion) of investment in 10
years and generate employment of 9 million person-days. The Government has
formulated and implemented several Plan Schemes to provide financial assistance for
setting up and modernising of food processing units, creation of infrastructure, support
for research and development and human resource development in addition to other
promotional measures to encourage the growth of the processed food sector.

INDUSTRY STRUCTURE
No specific structure exists as it is a highly segmented industry and each segment
contained within has it’s own way of functioning. It would be made clearer as we go
through the document.
MARKET

INDIAN FOOD PROCESSING INDUSTRY

 The Food Processing Industry is estimated to grow at 9-12%, on the basis of an

estimated GDP growth rate of 6-8%, during the tenth plan period.
 Value addition of food products is expected to increased from the current 8% to
35% by the end of 2025. Fruit & vegetable processing which is currently around
2% of total production will increase to 10% by 2010 and to 25% by 2025.
 The industry employs 1.6mn workers directly. The number of people employed by
the industry is projected to grow to 37mn direct and indirect job workers by 2025.
 The total exports of the Food Processing Industry in 2001-02 were Rs136bn and
the target exports for subsequent years kept on incresing at the rate of 7-8 %
annually. Marine products export was the single largest constituent of the total
exports of processed foods contributing over 40% of total processed food exports.
 Five-year tax holiday for new food processing units in fruits and vegetable
processing along with other benefits in Budget 2004-05 has bolstered the
Government’s resolution of encouraging growth in this sector.
 India is the largest producer of milk in the world with an estimated production of
91mn tons in the year 2002-03. Milk and milk products account for a significant
17% of India’s total expenditure on food and the popular milk products are
cheese, butter, ghee, dairy whiteners and ice-creams.
 The Indian snack food market comprising bakery products, ready to eat mixes,
curries, chips, namkeens and other processed foods is large, diverse and
dominated by the unorganized sector.
 The total size of the Indian snack food market is at an estimated over 400,000 tons
in volume terms and Rs100bn in value terms and is growing at over 10% for the
last three years (2000-2003). The three largest consumed categories of packaged
foods are packed tea, biscuits and soft drinks.

DEMAND AND SUPPLY

Due to diversified consumption patterns the demand and supply is varied and cannot be
quantified.
SEGMENTAL ANALYSIS
Important sub sectors in food processing industries are:-

 Fruit & Vegetable Processing

 Fish-processing
 Milk Processing
 Meat & Poultry Processing
 Packaged/Convenience Foods
 Alcoholic beverages & Soft drinks
 Grain Processing.
 FRUITS AND VEGETABLES PROCESSING
Historically speaking, processing of fruit & vegetables in the simplest form like pickling,
sundrying and or making preserves has been practiced in the country from very ancient
times almost in every home.

Food processing industry has been recognised by the government as a major sector of
growth.

PROGRESS OF THE INDUSTRY

It was in the First World War that some mechanization and commercialisation entered
into this industry mainly to meet the demand of the armed forces. The Second World War
gave it a much-needed fillip. Since then it has been progressing fairly well and has been
meeting the entire local demand and in a very limited way entered the exports market. It
is, however, not a heavy weight industry but has the potential to develop into a Sunshine
Industry of the country. Inspite of the fact that India, is the second largest producer of
fruit and also of vegetables in the world yet the commercial processing of fruit &
vegetables is less than 2.0%.

PROCESSING UNITS AND INSTALLED CAPACITY

Presently there is a little over 5198 units registered under the Fruit Products Order of
1955 distributed all over the country. Most of the units fall in the cottage and or small-
scale sector. A few modern processing plants have, now come up and many more are in
the pipeline.

MODERN UNITS
After the liberalisation of the economic policies in the country a few very modern plants
to produce mango pulp, tomato paste etc. in aseptic packing, freeze drying of many fruit
& vegetables including mushroom is being taken up. It is expected that in the years to
come many modern state of the art plants shall come up.

Since liberalisation in july, 1999 till February, 2000. 1120 proposals of industrial licenses
and 100% export oriented units were approved and about 248 such proposals have
already been emplemented.

The important countries with which the Joint Ventures have been signed are U.S.A.,
U.K., Netherlands, Switzerland, and Germany.

PRODUCT RANGE
The important items manufactured in the country are fruit pulps particularly of tomatoes
& mangoes, ready to serve juices, canned fruits, jam, pickles, squashes, etc. Recently,
items like frozen fruits, pulps, dehydrated & freeze dried vegetables, canned mushrooms
etc. are also being produced. In the coming years new items like carbonated fruit drinks,
dehydrated and freeze dried fruits, fruit juice concentrate are expected to be
manufactured.
EXPORTS
India in a small way has been in the export market for almost 30 years. Among the
popular items in export are mango chutneys, pickles. Fruit juices, canned and dehydrated
mushrooms, frozen & canned fruit & vegetables.

In the year 1997-98 the exports of processed fruit and vegetables were in the order of 299
thousand tonnes valued at Rs. 761 crores or US $ 200 million.

FUTURE OF THE INDUSTRY

Because of the liberal government and other developmental measures being taken the
future of the Industry looks very bright. The production base is being enlarged, modern
methods of cultivation are being adopted thus improving the productivity and cutting the
per unit cost. To some extent cold chain is being provided, which will help in retaining
quality, freshness and reduce post-harvest losses. The quality is now the watchword for
success.

The multinationals now entering the food industry have an international marketing
network and have their brand loyalties all over the world. This will enable the Indian
products reaching all over the world in the form and packing required.
With the rise in the per capita income particularly of the middle class a drastic change in
the food habits has been noticed. This will lead to an increased domestic consumption of
processed foodstuff.

INVESTMENT OPPORTUNITIES
The country's share in the world trade of processed fruits and vegetables is still less than
one percent. As such, abundant investment opportunities are there in the expanding
domestic market and export arena. An increasing acceptance of new products with market
development efforts is seen.

Changes in export-import policies and exchange rate adjustments have helped improving
the export potential.

There is a good international demand for certain fresh fruits as well as processed fruits
products. Fresh fruits identified as having good export potential are: mango, grapes,
banana, lichee and exotic fruits like sapota, ber, pomegranate, custard apple and other
tropical fruits.

Among vegetables, the items identified as having good export potential are: onion, potato
and green traditional vegetables like: okra, bitter gourd, green chillies and other seasonal
vegetables.
 FISH PROCESSING
With its over 8000 km. of coastline, 3 million hectares of reservoirs and 1.4 million
hectares of brackish water, India has vast potential for fishes from both inland and marine
resources. Units mostly exist in the small scale sector as proprietary/partnership firms or
fishermen co-operatives. Over the last decade, the organized corporate sector has become
increasingly involved in preservation, processing and export of coastal fish.

PRODUCTS AND PRESENT STATUS

 Sixty per cent of the production of fish in India is from marine sources.
 Processing of produce into canned and frozen forms is carried out almost entirely
for the export market.

INVESTMENT OPPORTUNITIES
With the liberalised policy, fish processing sector has been attracting more foreign
investments. Processed IQF marine products fetch better price than conventional block
frozen materials in the foreign markets.

RAW MATERIAL'S AVAILABILITY

India's substantial fishery resources are seriously under-utilised and it is widely
recognised that there is substantial potential to increase the output of this sector.

Over half of the production of fish originates from marine sources of which coastal
fishing from the continental shelf accounts for the bulk of the catch. It is estimated that
only 10% of the marine catch derives from deep sea resources.

The Indian seafood sector depends for its raw material upon both the traditional and non-
traditional fishing sectors.Fishing is principally confined to the small scale sector and
embraces individual fishermen, small partnership firms, private and public limited
companies and co-operatives.
 MILK PROCESSING
India has one of the largest livestock populations in the world. Fifty percent of the
buffaloes and twenty percent of the cattle in the world are found in India.India is the
second largest milk producing country with anticipated production of about 78 million
tons during 1999-2000.

The milk surplus states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan, Gujarat,
Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. The manufacturing of milk
products is concentrated in these milk surplus States.

The production of milk products i.e milk products including infant milk food, malted
food, condensed milk & cheese stood at 3.07 lakh tonnes in 1999-2000.Production of
milk-powder including infant milk-food has risen to 2.25 lakh tons in 1999-2000,
whereas that of malted food is at 65000 tons.

Cheese and condensed milk production stands at 5000 and 11000 tonnes respectively.
Some plants are coming-up for producing lactose, cassein and improved cheese varieties.

INDUSTRY STATUS
India is set to retain its position as the world’s largest milk production in 1999-2000 with
the output expected to touch 78 million tonnes mark, up from 74.5 million tonnes last
year. The large increase in milk production has been the result of frozen semen
technology.The estimated production of condensed milk has increased from 9000 tonnes
in the year 1998 to 11,000 tones in the year 1999.

Milk Products:
Principal dairy products manufacturers are:
Company Brands Major Products
Nestle India Limited Milkmaid, Sweetened condensed milk and
Cerelac, Lactogen milk powder
Milkfood Limited Milkfood Ghee, ice cream, and other milk
products
SmithKline Beecham Horlicks Malted milkfood, ghee, butter,
Limited powdered milk, milk fluid and
other milk based baby foods.
Indodan Industries Limited Indana Condensed milk, skimmed milk
powder, whole milk powder,
dairy milk whitener, chilled and
processed milk
Gujarat Co-operative milk Amul Butter, cheese and other milk
Marketing Federation products
Limited
H.J. Heinz Limited Farex, Infant milkfood, malted milkfood
Complan,Glactose,
Bonniemix, Vitamilk
Cadbury Bournvita Malted foo
Liberalisation of the economy has led to a flood of new entrants, including MNCs due to
good prospects and abundant supply of the raw material.

Milk and Milk Products Order (MMPO) regulates milk and milk products production in
the country. The order requires no permission for units handling less than 10,000 litres of
liquid milk per day or milk solids upto 500 tpa.

All the milk products except malted foods are covered in the category of industries for
which foreign equity participation upto 51% is automatically allowed. No license is
required for setting up of large scale production facilities for manufacture of ice cream.
Subsequent to decanalisation, exports of some milk based products are freely allowed
provided these units comply with the compulsory inspection requirements of concerned
agencies like: National Dairy Development Board, Export Inspection Council etc.
 MEAT & POULTRY PROCESSING
The production of meat and meat products has shown an impressive growth. The details
of production of meat and meat products from 1994 to 1998 is as under: (in thousand
tonnes)

Sr.No 1994 1995 1996 1997 1998

1. Mutton and637 647 669 670 675
Goat Meat
2. Pork Meat 366 420 420 420 420
3. Poultry Meat 422 578 480 580 600
4. Cattle Meat1290 1292 1202 1292 1295
(Beef)
5. Buffalo Meat 1200 1204 1204 1205 1210

GROWTH DRIVERS

Source-Annual Report 1999-2000 ,MFPI

The total meat production in the country is 4 million tonnes which includes beef, buffalo
meat, mutton, goat meat, pork and poultry meat. However, only about 1% of the total
meat is converted into value added products like sausages, ham becon etc.
Poultry processing is still in its infancy. There are only seven modern integrated poultry
processing plants.

The country has 3600 slaughter houses, 9 modern abattoirs and 171meat processing units
licensed under Meat Products Order. A few modern pork processing plants are also
coming up in the country.

RAW MATERIAL AVAILABILITY

Poultry and Meat Products India's animal resources are substantial when measure strictly
in terms of numbers. However, most animals are not bred for meat (most Indians are
vegetarian). Cattle are mainly reared for milk and as drought animals.

Consumption per head of both fresh and processed meat in India is very low at 1.5
kilograms. This compares with the world average of 35.5 kilograms.

There are a number of issues which presently affect the effectiveness of the meat
processing industry in India. These are summarized below:

 Quality of animal herds, with the possible exception of milking herds, has
received little attention resulting in low efficiency of food conversion and poor
ratios of lean to fat.
 Animal feed, which is vitally important in tropical countries when dry season lack
of rain reduces grass production, is very limited and distribution is poor.
 Lack of veterinary support reduces the level of both dairy and meat production.
Fragmented herd ownership means farmers do not have sufficient funds to pay for
services and drugs. Animal diseases are widespread with consequent effect upon
meat and dairy quality.
 Abattoir management is poor and technologies employed are out of date. During
the 1990s a number of initiatives have been introduced to improve the quality of
abattoirs. Overall, there has been little improvement even in the licensed sector. In
the unlicensed sector there has been none at all.
 Slaughter levels remain low, particularly among cattle and beef populations. This
results in poor exploitation of the animal population.
 The use of by-products is very limited which substantially raises the cost of the
meat to the consumer.
 The lack of a chilled distribution system means that the majority of slaughter
house are located close to the metropolitan centers.

As a result of the above constraints, most meat consumed in India is eaten fresh. Only a
minute quantity of meat undergoes further processing. Official estimates put the total at
around 5,000 tonnes although trade sources consider that this may be a substantial
underestimate.
The demand for processed meat products which can be rapidly cooked will rise.
GOVERNMENT POLICIES

 The Meat Products Control Order, 1973 under the Essential Commodities Act, 1954
regulates the manufacture, quality and sale of all meat products and is operated by
the Directorate of Marketing and Inspection, Faridabad. A license is required under
this order to set up a factory for producing/processing meat products.
 Export of meat is subjected to pre-shipment inspection and a certificate is required
from State Animal Husbandry Department/Directorate of Marketing and Inspection
that the meat was obtained from healthy animals, slaughtered in a licensed slaughter
house, and is fit for human consumption. In addition, a certificate specifying that
the meat has been tested for specific micro-organisms like E.coli, salmonellas is
required.
 The export of canned and other value added meat products, additionally require
certificate of tests performed as per the standards specified under the Meat Food
Products Order from the Directorate of Marketing and Inspection, Faridabad.
 Slaughter of cows is banned in most of the States. Export of beef is prohibited.
 A No Objection Certificate (NOC) has to be obtained from the District
administration for the slaughter of cattle, buffaloes etc.
 Permission from the civic bodies/State Government (Department of Animal
Husbandry) is also required before setting up a meat processing unit integrated with
a slaughter house.

INVESTMENT OPPORTUNITIES

There is a large potential for setting up of modern slaughter facilities and development of
cold chains in meat and poultry processing sector. The market has not been taken tapped
tally for ready-to-eat and semi-processed meat products in the domestic market as well as
for exports to neighboring countries especially to the Middle East. Buffalo meat is
surplus in the country and has good export potential. Poultry production and egg
processing industries have come up in the country in a big way and are exporting egg
powder, frozen egg yolk, albumin powder to Europe, Japan and some other countries.
Meat products have a growth rate of 10% whereas the growth rate of of eggs and broilers
are 16% to 20% respectively.

Most of the production of meat and meat products continues to be in unorganized sector.
However, some branded products have also come up in the domestic market. At present,
poultry export from India is mostly to Maldives and Oman. Some other markets can be
explored for export of poultry meat products like Japan, Malaysia, Indonesia and
Singapore.
MAJOR PLAYERS

Principal manufacturers of processed meat products include:

COMPANY MAJOR PRODUCTS BRANDS

Frigo Refico Allana Frozen buffalo meat Allana

Limited, Kulaba,Mumbai

Frigo Refico Allana Canned meat Allana

Limited, Kulaba,Mumbai

Hind Industries Limited, Frozen buffalo meat Sibaco,Eatco

New Delhi

Hind Industries Limited, Chilled/Frozen sheep and Sibaco,Eatco

New Delhi Goat meat

Alkabeer Exports Limited, Frozen buffalo meat Alkabeer

Mumbai

Alkabeer Exports Limited, Chilled/Frozen sheep and Alkabeer

Mumbai Goat meat

P.M.L. Industries, Frozen buffalo meat PML

Chandigarh

U.P. Pashudhan Udyog Pork and other meat CDF

Nigam Ltd. Uttar Pradesh products

U.P. Pashudhan Udyog Canned meat manufactures CDF

Nigam Ltd. Uttar Pradesh
 COMPANY MAJOR PRODUCTS BRANDS

A.P. Meat & Poultry Pork and other meat APSMPC

Corporation,Hyderabad products

Pigpo, Jorbagh Market, New Pork and other meat Pigpo

Delhi products

MAFCO, Mumbai Pork and other meat MAFCO

products

Ranchi Bacon Factory, Pork and other meat

Ranchi products

Rajasthan Meat and Wool Canned meat Manufactures

Marketing Federation,
Alwar

Venkateshwara Hatcheries, Poultry products Venky’s Food

Pune

DeeJay, Bangalore Poultry products

Source : Ministry of Food Processing Industries

 PACKAGED/CONVENIENCE FOODS
Packaged food products have been slow in penetrating the large potential presented by
India's 250 million strong middle class. But due to growing urbanization and changing
food habits, the demand has been rising at a good pace and there is enough latent market
potential waiting to be exploited through developmental efforts.

PRESENT STATUS
This segment comprises of bread, biscuits and other bakery products, confectionery,
chocolates and cocoa products, soya-based products, ready to eat pasta products like
noodles, cereal flakes etc., high protein foods and other processed foods/snack foods.
Besides, items like starch, glucose etc, required for food products are also included.

The soya products industry, worth over Rs.80 crores (US $ 22.2 million) , has been
growing at around 10% Several large units have come up due to their enormous export
potential.

The size of the semi-processed/ready to eat food segment is over Rs.4000 crores (US $
1.1 billion) with over 60,000 bakeries, 20,000 traditional food units and
starch/glucose/sorbitol producing units have also come up, catering to domestic and
international markets. In confectionery & cocoa based products several MNCs have set
up manufacturing units.

Production of macroni/noodles is about 16500 tons, pearl barley at 1,240 tons and corn-
flakes at about 600 tons. Annual Production of bread & biscuits and other bakery
products in the country is estimated at 30 million tonnes.

GOVERNMENT POLICIES
The packaging laws and regulations affecting food products are mainly covered under the
Standards of Weights and Measures Act, 1976, and the Standards of Weights and
Measures (Packaged Commodities) Rules, 1977 (SWMA) specifying the quantity and
package-labelling regulations for all products.

The Prevention of Food Adulteration Act, 1954, and the Prevention of Food Adulteration
Rules, 1955 (PFA) specify food adulteration/contamination norms and permissible
ingredients` from consumer health and safety point of view.

The Agmark Rules relate to the quality specifications and needs of certain agricultural
products to be eligible for Agmark certification. Some of the food products like edible
nuts, honey etc may be covered under this.

The industry is delicensed and automatic approval for foreign investment upto 51% of
equity (except for items like malted food and items which are reserved for production in
small scale sector) is granted. The setting up of 100% export oriented units requires
specific govt. approval.

INVESTMENT OPPURTUNITIES
The convenience foods segment, growing at a rate of 20%, offers the greatest potential.
Export of soya based products is increasing at a rapid pace.
Technological revolutions in processing and packing of food products, coupled with fast
growing inland and export markets presents a very good potential for further investment
in this sector.
 ALCOHOLIC BEVERAGES & SOFT DRINKS
Beer and Alcoholic Beverages
The importation of potable alcohol is subject to government licensing. Alcoholic drinks
carry a very heavy tax burden which is itself a major source of revenue for state
governments.

Liquor manufactured in India is categorized as beer, country liquor and Indian Made
Foreign Liquor (IMFL). IMFL production includes wines, whiskey, rum, vodka, gin and
brandy.

PRESENT INDUSTRY STATUS

Currently the industry is dominated by 3 brewers, the United Breweries, Shaw Wallace
and Mohan Meakins dominate the market. However, a number of international brewers
are starting to become established. Joint ventures will continue to be more important as
the distribution network in India is complex.

There are around 23,000 licensed liquor outlets in India, with another 10,000 outlets such
as bars and restaurants.

Whisky and Other Spirits

In India country liquor and IMFL cater for two quite different sectors of the liquor
market. Country liquor is consumed in rural areas and by low-income groups in urban
areas. IMFL is consumed by the middle and high income groups, primarily in urban
areas.

As was found to be the case with beer, so it is with whisky. Increasingly more and more
of the major international liquor companies are introducing new brands in India through
local joint venture arrangements. These include the following new whisky brands:

 Allied Domeq with Clan Morgan & Co to produce Teachers Brand Scotch
Whiskies.
 IDV (Grand Met.) with Polychem Limited to produce Spey Royal Scotch Whiskey.
 United distillers with U.B.Group to produce Black & White, Blend 69, Black Dog
& Vat 69.
 Seagram with Seagram India to produce Something Special, 100 Pipers Scotch
Whiskey.
 McDonald & Muir with Mohan Meakins to produce Highland Queen Scotch
Whiskey.
 White spirits are considered by many observers to be the next major growth sector.

Wine
It is only very recently that wine has begun to be produced on a significant scale in India.
Its production takes place in both the organized and the household sectors. Sparkling
wine is also manufactured in India. However, this is intended for the export market and
the volumes involved are small.

SOFT DRINKS
The production of soft drinks have increased from 5670 million bottles in 1998-99 to
6230 million bottles in 1999-2000.
Range & Scope Of Products

These major product group are non-alcoholic flavoured/sweetened beverages,Cola,

Orange & Lemon are some of the accepted ,tasted in India. Currently it is estimated that
65% prefer non-alcoholic drinks. Manufacture of Packaged drinks is governed by FPO.
Major Players

There are several well established corporations in this Industry with widely advertised
Brands.Some of the major manufacturers are

 Parle (Exports) Pvt.Ltd

 Pepsi Foods Ltd
 Coca-Cola
 Pure Drinks (New Delhi) Ltd.

PRESENT INDUSTRY STATUS

 Source: www.mofpi.nic.in

GRAIN PROCESSING
India produces about 200 million tonnes of different food grains every year. All major
grains --paddy, wheat, maize, barley, millets like: jowar (great millet), bajra (pearl millet)
& ragi (finger millet) are produced in the country. The country is self sufficient in grain
production and is the second largest rice producer in world, with a 20% share.

PRESENT INDUSTRY STATUS

 Source - Ministry of Food Processing Industries, Annual Report 1999-2000

Primary milling of rice, wheat and pulses is the most important activity in food grains.
There are over 91,000 rice hullers and 2,60,000 small flour mills engaged in primary
milling. Further there are about 43,000 modernised rice mills/huller-cum shellers and the
quantity of rice bran processed for bran-oil extraction stood at 3.4 million tonnes in 1999-
2000.

Around 820 large flour mills in the country convert about 10.5 million tonnes of wheat
into wheat products. Also there are 10,000 pulse mills milling about 75% of pulse
production of 14 million tonnes in the country.

Branded rice is becoming popular in the country and significant corporate presence is
there in the domestic as well as export markets. Some quantity of wheat and wheat
products has also been exported.

Ninety Four foreign investment and 100% EOU proposals have been approved in the rice
milling sector, with a total investment of about Rs.949 crores (US $ 235 million). Eight
pulse milling units as 100% EOU have also been approved.

GOVERNMENT POLICIES
The Rice Milling Industry (Regulation) Act 1958 & Rice Milling Industry (Regulation &
Licensing) Rules 1959 have been repealed w.e.f 28th May, 1997. Further, Rice milling
and pulse milling sectors, which were earlier reserved for the small scale sector, have
now been dereserved. As such, no license/permission is now required for setting up a rice
mill/pulse mill.

Since liberalisation, there is no license requirement for setting up or capacity expansion

of roller flour mills. The mills can obtain their wheat supply from any source. Also there
is no license requirement or price/distribution controls on manufacture of wheat products.

INVESTMENT OPPURTUNITIES
With the popularity of branded rice and flour among urban population, the investment
scope in the field has increased. Also, there is very good demand of Indian basmati and
non-basmati rice in export markets and a lot of export has been taking place.

Leading Players:

Agro Foods Pvt Ltd HLL Ltd Parle Products Pvt Ltd
Britannia Industries Ltd Haldiram Pvt Ltd PepsiCo Inc
Dabur India Ltd (Foods) ITC Ltd General Mills-Pillsbury
Dynamix Dairy Ind Ltd MTR Foods Ltd Surya Foods and Agro Pvt
Ltd
Gits Food Products Pvt Ltd Nestle Ltd Tata Chemicals Ltd
Godrej Industries Ltd-Foods Division Parle Agro Pvt Ltd

Financing of the food processing sector

The structural complexion of the Indian supply chain has led to limited scale of financing
as well as higher risk, given the lack of control of each of the players, on the supply
chain.

✔ Financing of farmers
Farmers often rely on unorganized sources of credit due to bottlenecks in access, timeless
in availability and adequacy of credit from organised sources. The key hurdles faced by
banks in financing farmers are their inability to provide adequate collateral as security
and the potential for default in the absence of an assured market for their produce.

✔ Financing of processing enterprises

The food processing enterprises primarily comprises small and medium sized companies,
a large proportion of which have stand alone operations, with no linkages with farmers,
and reliant on other organizations to undertake marketing/further processing of their
products. Consequently, companies in the food-processing sector usually bear a steep cost
of interest for the high-risk perception associated with the nature of their operations.

Further there are several regulations which limit availability of finance to the sector,
including the definition of priority sector lending, the Cooperatives Act and the
Warehousing Corporation Act.

Absence of well-developed risk mitigation tools has further impacted availability of

finance to the food abd agriculture sector. Additionally, crop insurance schemes in India
have faced various issues including assessment of farmer yield at the mandal level, lack
of past statistical data to calculate premia, high premia for certain crops and
administrative hurdles in managing claims, thus resulting in poor economic viability as
also limited benefit to farmers.

✔ FDI in food processing

FDI in the food-processing sector is low, constituting a mere 4% of total FDI in the
period 1991-2004. The actual inflow is only about 28% of FDI approved (INR 4.2 billion
out of approved INR 11.6 billion). This is despite the fact that with the exception of food
retailing, plantation and alcoholic beverages, 100% FDI Is permitted in the sector.

✔ Government Schemes
Government provides assistance to the industry and entrepreneurs under various schemes.
While there are significant overlaps in these on the one hand, there are several undressed
need gaps of the industry, on the other. Further, the restriction of quantum of finance
assistance per unit disincentives. Additionally, the structure of the scheme needs to be
based on specific sectoral requirements. The Government needs to have a robust
monitoring mechanism to assess the direct and indirect impact of such assistance.

RISK AND CONSTRAINTS

Constraints in the growth of food processing

Sub-optimal growth of Food Processing can be attributed to the vicious circles of high
unit cost low demand low capacity and utilization high unit cost. Domestically,
affordability is the key issue. Price differential between fresh and processed food. Low
income Indians are very price sensitive since food accounts for over 50% of the family
budget.

Availability cost and timeless of credit are thus major issues. Banks have looked at
segmented financing of the food supply chain(producer to processor to retailer to
consumer) leading to high risk regime. Moreover, cost of credit of an SSI unit is 2 to 3%
higher than that for large units. Working Capital is even a bigger problem for this sector
and its inventory requirement is high.

Cost of packaging sometimes may exceed 20% of the end consumer price. Large
proportion of processed food is sold and bought in small packs which translate into even
higher cost of packaging.

In the long and fragmented supply chain, right from farm to Mandi to processor to
distributor to retailers, there is too many points of intermediation & disconnect. In the
process, there is mis-match between demand and supply, limited choice to consumers,
unacceptable wastage and hygiene, avoidable cost addition and opportunistic
profiteering.

Marketing & distribution except by the big companies is largely unorganized and
fragmented. Sales through large organized formats contribute 72% of food consumption
across the world but its share is about 1% in India. Taxes on food in India are very high
by international standard. Central and State taxes together increase cost to consumer
often by 20%-30%.

GOVERNMENT POLICY

Steps taken so far to promote food processing

Food processing is declared a priority sector.
  No industrial license is required for food processing except for alcoholic beverages
and a few items reserved for SSI.

 100% FDI is allowed except in alcoholic beverages and items reserved for SSI.

 Foreign equity up to 25% is allowed even in SSI reserved items. For equity beyond
25%, export obligations of 50% apply.

 Agro based units established in special economic zones and 100% EOU are allowed
(a) Sales up to 50% in domestic tariff area, and (b) import of capital goods and raw
materials at zero duty.

 In order to boost the food processing sector, the Centre has permitted under the
Income Tax Act a deduction of 100 per cent of profit for five years and 25 per cent
of profit in the next five years in case of new agro processing industries set up to
package and preserve fruits and vegetables. Excise Duty of 16 per cent on dairy
machinery has been fully waived off and excise duty on meat, poultry and fish
products has been reduced from 16 per cent to 8 per cent.

 Food Parks
In a bid to boost the food sector, the Government is working on agrizones and the
concept of mega food parks. Twenty such mega parks will come up across the country
in various cities to attract Foreign Direct Investment (FDI) in the food processing
sector. The ministry has released a total assistance of Rs.105.22 crore (US$ 23
million) to implement the Food Parks Scheme.

As a result of several POLICY INITIATIVES undertaken since liberalisation in August

1991, the industry has witnessed fast growth in most of the segments. As per a recent
study on the food processing sector, the turnover of the total food market is
approximately Rs.250,000 crores (US $ 69.4 billion) out of which value-added food
products comprise Rs.80,000 crores (US $ 22.2 billion).

Since liberalisation in Aug'91 and up-till Feb 2000 proposals for projects of over
Rs.53,800 crores (US.13.4 billion) have been proposed in various segments of the food
and agro-processing industry. Besides this, Govt. has also approved proposals for joint
ventures, foreign collaboration, industrial licenses and 100%export oriented units
envisaging an investment of Rs.19,100 crores (US $ 4.80 billion) during the same period.
Out of this, foreign investment is over Rs. 9100 crores (US $ 18.2 billion).

Processed food exports were at over Rs.13,500 crores (US $ 3.2 billion ) in 1998-99. Out
of these exports, rice accounted for 46%, whereas marine products accounted for over
34%.

Primary food processing is a major industry with lakhs of rice-mills/hullers, flour mills,
pulse mills and oil-seed mills. There are several thousands of bakeries, traditional food
units and fruit/veg./spice processing units in unorganised sector.
In the organised sector, there are over 820 flour mills, 418 fish processing units, 5198
fruit/veg processing units, 171 meat processing units.

India is the world's second largest producer of fruits & vegetables, but hardly 2% of the
produce is processed. India is the land of spices producing all varieties worth over Rs.
3500 crores (US $ 900million) amounting to 25-30% of world production, which is
processed for value-addition and export. It grows 22 million tonnes of oilseeds covering
most of the varieties. Other important plantation products include tea, coffee, cocoa and
cashew.

It has large marine product and processing potential with varied fish resources along the
8041 km. long coastline, 28000 km. of rivers and millions of hectares of reservoirs &
brackish water. India's livestock population is largest in the world with 50% of world's
buffaloes and

20% of cattles, but only about 1% of total meat production is converted to value added
products.
India is the largest milk producer in the world and about 15% of the total milk production
is processed through the organised sector.

Size of the semi-processed and ready to eat packaged food industry is over Rs. 4000
crores (US $ 1 billion) and is growing at over 20%.
RECOMMENDATIONS
This was the detailed analysis of "Indian Food Processing Industry".

In next few sections of the report we will concentrate on the food processing companies
in western part of India.

West Zone of the Food Corporation of India monitors the activities of the F.C.I. in the
States of Maharashtra, Goa, Gujarat, M.P. and Chhatisgarh and also the Union Territories
of Daman, Diu, Dadra and Nagar Haveli.
The main operational activities of the Corporation in this Zone are Storage, Movement,
Procurement, Public Distribution, dispatch of levy sugar and other allied activities.

Chhattisgarh, Madhya Pradesh and Maharashtra contribute to rice and wheat procurement
States of Chhatisgarh and Madhya Pradesh undertake procurement under decentralized
scheme also.
LIST OF COMPANIES
Following companies are sorted from large databases on the basis of following
parameter: turnover, networth and profitability. Following is the list of food processing
industries, in western zone with a turnover of more than Rs. Three hundred crores

COMPANY NAME TURNOVER (IN INR CRORERS)

Allansons Ltd. 1,330
Bilag Industries Pvt. Ltd. 410
De-Nocil Crop Protection Pvt. Ltd. 300
Syngenta India Ltd. 453
Tata Tea 900
Ventakeshwara Hatcheries Pvt. Ltd. 302
Vimal Oil & Foods Ltd. 366
Liberty Oil Mills Ltd. 1,097
Agro Tech Foods Ltd. 938
Britannia Industries Ltd. 1,818
Dabur India Ltd. 838
Hindustan Lever Ltd. 11,365
ITC Ltd. 3,166
Nestle India Private Ltd. 2,816
Godrej Beverages & Food Ltd. 4,500
Tata Chemicals Ltd. 3,008
Pepsico India Ltd. 14,679
 CONCLUSION OF THE REPORT
To conclude this report, lets have a quick recap of recommendations given at the end of
analysis of each of the five industry.

CHEMICAL INDUSTRY
For most of the leading companies in speciality segment and pharmaceutical sement, the
future is indeed promising. Biotech, is also an upcoming sector and its market will shoot
high with coming period. Investment in these segments will be profitable.

POWER EQUIPMENT INDUSTRY

This is a very important industry, as its growth is directly related to the development of
all other sectors of country’s economy. It is a ever growing sector. Especially, investment
in non-renewable sources of power generation will yield colourful results.

AUTO ANCILLARY INDUSTRY

The industry displays tremendous potential in generating employment and boosting
entrepreneurship in the country. The vast market for auto components, and the diverse
products and technology involved ensures a place and role for many. At the same time,
the entry of several global automobile manufacturers will bring in more regulation into
the industry and see a pruning of the spurious market.

It is one of the hottest industries and investing in it will bring big returns.

TEXTILE INDUSTRY
The future prospects for the Indian industry are bright (particularly in the post-quota
regime) but the growth rate of the industry is not very good. The industry is in an
expansion mode and is likely to benefit from growing demand both in the domestic as
well as global markets. Investment will bring profits but certainty is not there.

FOOD PROCESSING INDUSTRY

This is one of the most upcoming sectors, especially in India. Investment will definitely
yield good results. Future of this industry is indeed bright.

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 VALUE ADDITIONS FROM THE PROJECT

At the individual level (Benefits to me)

 Practical application of theoretical concepts, major ones are

 working capital cycle
 cash management services
 Trade services
 Treasury products
 Short term working capital financing
 Balance sheet analysis

 Knowledge regarding the key parameters in the industries (within the scope of
this project).
 Industry structure
 Segments of the industry
 Industry dynamics
 Growth drivers
 Risks and constraint
 Investment requirements
 Key players
 Future outlook

 Where and what are the opportunities available to finance in that industry

At the Organizational level (Benefits to HDFC Bank)

 Industry analysis of five industries where the bank is looking at opportunities to

expand.
 List of potential clients in those industries

141
 REFERENCES

www.dnb.co.in
www.icfdc.com
www.crisil.com
www.citiindia.com
www.chemical.gov.in
www.chemchannels.com
www.mofpi.nic.in
www.fibre2fashion.com
www.textilescommitee.nic.in
www.ciionline.org
www.asiatradehub.com
www.indiacore.com
CRISIL’s “Annual Review on Chemical Industry”
ICFAI Publications “Financial Management”

142
The information presented in this document has been extracted from various publicly
available documents and sources, including officially prepared materials from the
Government and its various ministries and has not been prepared or independently
verified by the Issuer or the Lead Managers. The Refrences section in the document
shows all the relevant sources.